Lehman Brothers International (Europe), Re

Central to the Scheme is the mechanism it provides for the

Three groups of creditors must be distinguished in this regard:

The Scheme provides for the statutory interest entitlements of the 8% Creditors and the Specified Interest Creditors to be calculated in accordance with the existing Waterfall judgments. For example, the Administrators will proceed on the basis that the rule in Bower v Marris does not apply to the calculation of statutory interest (as David Richards J and the Court of Appeal held in the Waterfall IIA Application), and no further appeal to the Supreme Court in relation to that issue will be possible: see above.

Further, the Scheme contains a detailed procedure for determining the statutory interest entitlements of Higher Rate Creditors. The avowed purpose of the procedure is to ensure that the statutory interest entitlements of Higher Rate Creditors can be determined in a manner that is both fair and expeditious, so as to avoid protracted disputes which could delay the distribution of the Surplus. The procedure can be summarised as follows:

The key features of the adjudication process are as follows:

The costs of the adjudication follow the event: they must be paid by LBIE or by the creditor, based on the “loser pays” principle.

Another important facet of the proposed adjudication system, and one which caused controversy, is the special role accorded to the Wentworth Group. In the course of negotiations leading to the development of the Scheme, the Wentworth Group stated that it would only support the Scheme if the Subordinated Creditor was permitted to have input in respect of the determination of matters which are likely to affect the recovery of the SubDebt. The upshot is that the Scheme requires LBIE to engage with the Subordinated Creditor in relation to various matters. For example:

Having considered the matter carefully, the Administrators are satisfied that it is appropriate for the Subordinated Creditor to be involved in this way. Where a Higher Rate Creditor certifies its cost of funding, the Subordinated Creditor has a significant economic interest in the outcome of the certification and adjudication process. It is therefore appropriate for the Subordinated Creditor to play a role in the process. Quite apart from the provisions of the Scheme, the Administrators would be expected to consult with the Subordinated Creditor on matters affecting its interests, and the Subordinated Creditor would be entitled to intervene in any legal proceedings relating to a disputed certification: see below.

The Wentworth Group and the Senior Creditor Group have entered into a lock-up agreement dated 22 December 2017 (the “Lock-Up Agreement”), pursuant to which they have agreed to support the Scheme. Further details relating to the Lock-Up Agreement are set out in the First PSL published on 18 April 2018 at paragraphs 5.11 to 5.16.

Also pursuant to the Lock-Up Agreement, the Wentworth Group and the Senior Creditor Group have agreed to accept the Settlement Premium in respect of all Higher Rate Claims (rather than seeking to certify their cost of funding).

The Lock-Up Agreement does not provide for the payment of any consent fee, however:

The Scheme additionally provides for the release of the following claims by Scheme Creditors against third parties:

The give and take evident in these provisions is clear. There is no doubt that the Scheme constitutes a “compromise or arrangement” within Part 26 of the CA 2006 (as those words were explained in Re Savoy Hotel Ltd [1981] Ch 351 and Re NFU Development Trust Ltd [1972] 1 WLR 1548). That is, of course, a necessary condition for the application of Part 26 and it is appropriate to record its satisfaction in any event; but I do so in this case also because in correspondence one creditor (Deutsche) at one time suggested that the Scheme was not a “compromise or arrangement”, though the suggestion, which was never explained, was (rightly, so it appears to me) not pursued.

The questions then are whether the Scheme has been approved by appropriately constituted classes and, if so, whether it is fair and free from ‘blot’ so that the Court should give it its sanction.

The first in the three stages (after development of the proposals themselves of course) which are mandated by Part 26 of the CA 2006 before a scheme may be sanctioned is an application to the Court for an order convening Scheme Meetings to consider and vote on the Scheme.

In this case, the Administrators applied (by Part 8 claim form) for such an order on 2 May 2018, and on 18 April 2018 published the First PSL as required by present practice (see Practice Statement [2002] 1 WLR 1345, “the Practice Statement”), followed by a Second PSL (dated 2 May 2018) in circumstances already described.

The Convening Hearing (as such hearings are often referred to) took place before me on 9, 10 and 11 May 2018. The Administrators submitted that the Scheme Creditors should vote at four Scheme Meetings, namely:

At the Convening Hearing, the Administrators’ proposals were opposed by three creditors, namely Deutsche and CRC Credit Fund Limited (“CRC”), both of which are Higher Rate creditors, and Marble Ridge Special Situations GP LLC (“Marble Ridge”) which also is a Higher Rate creditor. These creditors were represented respectively by Mr Andrew Twigger QC, Mr Andrew de Mestre and Ms Hilary Stonefrost.

After adjourning for a short time to consider the matter, I accepted these proposals, and made a Convening Order accordingly, for reasons that I sought to set out fairly summarily in an oral judgment, now I think to be found at [COUNSEL PLEASE COMPLETE].

When I gave that judgment, I anticipated that there would or might be further evidence adduced, especially as to the claimed identity between all the Wentworth companies. In the event, however, CRC and Marble Ridge voted in favour of the Scheme (after its amendment in respect of aspects of the adjudication process) and (as previously mentioned) Deutsche has withdrawn its objection stating in its solicitors (Clifford Chance’s) letter of 11 June 2018 that it

“does not…object to the court’s sanctioning the proposed scheme, should the court see fit to do so.”

GSI, which did not appear at the Convening Hearing or the Sanction Hearing, indicated in correspondence (and, in particular, in a letter to the Administrators dated 5 February 2018) which was before the Court and carefully considered at the Convening Hearing, its “concerns relating to both the process by which the Proposed Scheme has been developed, and the substance of the Proposed Scheme”, and I took it to support Deutsche’s objections. But GSI never made clear any other reasoned basis for objection to the class composition; and, as I say, did not see fit to pursue that before me at either hearing other than in the somewhat indirect way I have described, save in one instance. The one instance is this: during the course of the Sanction Hearing its solicitors, Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”) requested the Administrators specifically to draw to my attention two matters by reference to a table in the Chairman’s Report on the meetings, which record the voting results at the four class meetings. I shall return to these matters in due course; but I shall first describe the procedure and results at the four meetings. Procedure and voting results

The Chairman’s Report on the scheme meetings which took place at the offices of Linklaters LLP after a short preliminary session dealing with administrative matters has described carefully the process followed and the outcome of the voting.

Inevitably, the class meetings 3 and 4 were formalistic: the Chairman held proxies at each on behalf of all Scheme Creditors within the class and cast them

The process at those meetings and the more contentious class meetings was entirely regular. I think the only matter I need mention before assessing the actual voting is that nine Higher Rate Creditors (participating in scheme meeting 2) exercised an entitlement pursuant to the Convening Order to submit Increased Voting Rights Requests on the basis that they should be entitled to voting rights greater than those calculated by applying an interest rate of 8% per annum. The Chairman’s Report records that in the exercise of his discretion he accepted all the requests and that of the nine, seven voted for the Scheme and two against.

The voting results at the meetings for (1) 8% Creditors and Specified Interest

These voting results, and a further analysis of the split between the votes of

The two points made by Cleary Gottlieb as referred to above at paragraph [53] can be seen from that Table, being as follows (quoting their e-mail directly):

These were fair points, neatly made: and though, like other points of objection, they were not pursued in oral argument (GSI and Cleary Gottlieb having apparently taken the decision not to appear, though it was of course open to them to do so), they seem to me to be relevant at every stage of the assessment of the Scheme, including any review of the class composition issue. That is a convenient point to turn to the three-stage approach which the Court has become accustomed to adopting in determining whether to sanction a scheme.

The relevant statutory provision is section 899 of the CA 2006 Act, which provides as follows:

“(1)

If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting summoned under section 896, agree to any compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.

(2)

An application under this section may be made by – (a) the company ...

(3)

A compromise or arrangement sanctioned by the court is binding on – (a) all creditors or the class of creditors or on the members or a class of members

... and (b) the company ...”

The term ‘company’ in this context means any company liable to be wound up under the Insolvency Act 1986, including a foreign company which though unregistered under the Companies Act has a “sufficient connection” with England or Wales (see Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2012]

The term ‘creditor’ for the purposes of a scheme has a broader meaning than it has for the purposes of liquidation. For the purposes of the scheme jurisdiction, any person who has a monetary claim against the company that, when payable, will constitute a debt is a ‘creditor’; and it matters not whether that claim is actual, prospective or contingent: see Re Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161, [2010] BCLC 496 at [58]; and Re Midland Coal, Coke & Iron Co [1895] 1 Ch 267 at 277.

Similarly, the terms ‘compromise’ and ‘arrangement’ have been construed widely by the Courts: all really that is required is a sequence of steps involving some element of give and take, rather than merely surrender or forfeiture.

In Re Telewest Communications (No. 2) Ltd [2005] BCC 36, David Richards J explained the principles to be considered by the Court when deciding whether to sanction a scheme of arrangement (at [20]-[22]):

“The classic formulation of the principles which guide the court in considering whether to sanction a scheme was set out by Plowman J in Re National Bank Ltd [1966] 1 All ER 1006 at 1012, [1966] 1 WLR 819 at 829 by reference to a passage in Buckley on the Companies Acts (13th edn, 1957) p 409, which has been approved and applied by the courts on many subsequent occasions: ‘In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with; secondly, that the class was 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 thirdly, 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.’

This formulation in particular recognises and balances two important factors. First, in deciding to sanction a scheme under s 425 [the predecessor of section 899], which has the effect of binding members or creditors who have voted against the scheme or abstained as well as those who voted in its favour, the court must be satisfied that it is a fair scheme. It must be a scheme that ‘an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve’. That test also makes clear that the scheme proposed need not be the only fair scheme or even, in the court’s view, the best scheme. Necessarily there may be reasonable differences of view on these issues. The second factor recognised by the above-cited passage is that in commercial matters members or creditors are much better judges of their own interests than the courts.

Subject to the qualifications set out in the second paragraph, the court

‘will be slow to differ from the meeting’.”

The passage from Buckley quoted by David Richards J effectively involves a three-stage test:

The breadth of its jurisdiction emphasises the care that must be taken by the Court in its exercise. In addition to satisfying itself as to the matters above, the Court must also be satisfied as to the adequacy and accuracy of the explanatory statement provided in respect of the scheme, and that its recipients have been afforded adequate time to consider their position and to give vitality to their right to object.

However, the most troublesome of the preconditions for the exercise of jurisdiction (in the sense of its propensity to give rise to difficult issues) is that the scheme must have been approved by the statutory majorities in value and number at class meetings in each case constituted by the Court and comprised only of

“those persons whose rights 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 v Dodd [1892] 2 QB 573 at 583 (Bowen LJ) and Re UDL Holdings Ltd [2002] 1 HKC 172 at [27] (Lord Millett NPJ). The issue is a fundamental one: for the jurisdiction of the Court to enable a majority to bind the minority on the terms of a scheme is dependent on the correct identification and composition of classes, and the passing of resolutions by the statutory majorities at properly constituted class meetings convened and held in accordance with the Court’s directions: and see In re Apcoa(No. 2) at [45].

But also fundamental, at least to the modern approach, is to distinguish between the legal rights which the scheme creditors have against the company, and their separate commercial or other interests or motives (whether or not related to the exercise of such rights). As Lord Millett clarified in UDL at 184-5: “The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their own private interests not derived from their legal rights against the company is not a ground for calling separate meetings … The question is whether the rights which are to be released or varied under the scheme or the new rights which the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class.”

Even then, a material difference in legal rights does not necessarily preclude their respective holders from being included in a single class: for the second part of the test enables that provided that they are not “so dissimilar as to make it impossible for them to consult together with a view to their common interest”. That, unusually and perhaps confusingly, introduces into a jurisdictional issue a subjective assessment, which may account for changing judicial perceptions over the years as to class constitution in the light of the developing and prevailing inclination of judges to recognise the dangers of giving a veto to a minority group by (in Lord Neuberger’s words in Re Anglo American Insurance Co Ltd [2001] 1 BCLC 755 at 764) being “too picky about different classes” and ending up “with virtually as many classes as there are members of a particular group.” Hence my statement in Re Primacom Holding GmbH

In parallel with this development of the Court’s approach to this issue of jurisdiction, the Court has also changed its practice and accepted that the identification of proper class composition is one to be addressed at the time of the Convening Hearing. Prior to Re Hawk Insurance Company Ltd [2002] BCC 300 the Court had declined to engage with the issue until the final (sanction) hearing, leaving it to the proponents of the scheme to live with their choices until the potential sudden death of disapproval at the final hurdle.

The purpose of the change of practice introduced pursuant to the observations of Chadwick LJ in Re Hawk, and now embodied in the Practice Statement, was and remains to accelerate to the first stage (at the Convening Hearing) consideration by the Court of the issue of class composition. Whilst the Court’s decision at that stage is not final, the applicant has a legitimate expectation that, unless circumstances materially alter or fresh considerations are put before it which the Court accepts should be addressed, the Court will not of its own motion change its mind, since (as I put it in In re APCOA Parking Holdings GmbH (No.2) “to do so would subvert the purpose of the revised practice”: and see also In re Hawk itself at [21] and Re Global Garden Pructs Italy SpA [2017] BCC 637, [2016] EWHC 1884 (Ch) at [43].

In the present case, there was substantial opposition to the proposals for class composition put forward by the Administrators at the Convening Hearing (which lasted two days). As I have said, three creditors each represented by Counsel put forward arguments why the proposals should be rejected. I sought to describe the arguments then advanced, and my assessment and adjudication of them, in an oral judgment given after time for consideration. As appears from that judgment, the focus at that stage was on (a) whether all the Wentworth entities, including the entity holding the Sub-Debt, should be seen as one, so that the proposal simply to establish a separate class meeting for the Sub-Debt entity did not really or sufficiently address the problem, on the principal basis, as Mr Twigger put it on behalf of Deutsche, of its suggested “failure to recognise that the benefits to be obtained from the Scheme by some of the Wentworth Parties with a view to their being shared among the Wentworth Parties as a whole means that none of the Wentworth Parties can consult with the independent Higher Rate Creditors who do not stand to receive those benefits”; and/or more particularly, (b) whether the right negotiated by the Wentworth Sub-Debt entity to be consulted in respect of the certification and adjudication process was a right shared (at least in economic or commercial terms) by all Wentworth entities so as to place them all in a different class from others; and (c) whether (as Marble Ridge submitted) there was a requirement for a separate class of creditors (like itself) which had acquired rights under a ISDA Master Agreement from a now insolvent entity which in consequence had especial difficulties in certifying its claim to interest, and thus was disadvantaged in and by the adjudication process. For reasons I sought to summarise, I did not consider any of these arguments justified rejection of the proposed class composition.

I had envisaged that there might be further evidence or reason adduced at the Sanction Hearing in support of the over-arching proposition that all the Wentworth entities were to be regarded in law as one: but that did not eventuate. As already stated, in point of fact, both CRC and Marble Ridge in

Thus, the reference in Cleary Gottlieb’s letter (to which I have referred in paragraph [53] above, and which was sent to the Administrators but produced to the Court at Cleary Gottlieb’s request during the Sanction Hearing), to my indication that I was not minded to revisit class composition issues at the hearing should be viewed in the light of the considerable exploration of the issue at the Convening Hearing, my outline judgment following it, and the fact that no further submissions were sought to be made to me by objectors.

However, I should perhaps make clear that, whilst I did not encourage further submissions on the point from proponents and supporters of the Scheme, I have nevertheless reviewed the issue precisely because it goes to jurisdiction, and also because I accept that in this case the question of class composition has not been straightforward.

I have been concerned especially to re-satisfy myself in respect of five features of the Scheme and its context, even though some were not the subject of objection at any stage: (a) the close association between the Wentworth companies; (b) the entitlement to consultation in some aspects of the adjudication process which the Wentworth Subordinated Creditor has obtained in the process of the Scheme’s development; (c) the Lock-Up Agreement; (d) the consent fee payable by Wentworth Group companies to the Senior Creditor Group; and (e) the fact that some provable debts though not legally owned by the Senior Creditor Group are or may be ultimately controlled by it.

As to (a) in paragraph [77] above, it appears to be obvious that the Wentworth Group companies are very closely associated, and likely that in economic terms, unlike other creditors, they have, as a group, legal rights and commercial interests as subordinated creditors which mean that what they lose as Higher Rate Interest creditors they stand to gain in that other capacity. The question I have had to consider is whether that introduces a difference of class rights; and, for example, whether I should take each Wentworth Group entity as having, for the purposes of class composition, cross-holdings and/or the legal rights enjoyed by each other, or another, Wentworth Group entity so as should have been taken to require all such entities to vote in a class separate to other creditors. I remain satisfied that it does not. It might have been different had evidence been advanced such as to persuade me that the Wentworth Group entities were not merely connected but in law each alter egos of the other; but it was not. Further, by analogy, cross-holdings (where a member of one class is also, in respect of another legal right, a member of another class) does not, of itself at least, fracture the class composition: see Re Telewest, UDL Holdings and also Re Primacom.

Similarly, as to (b) in paragraph [77] above, I also remain of the view that the fact that the Wentworth Group entity holding the Sub-Debt (which itself has no other claims), has (apparently as a condition of its support for the Scheme) negotiated to have various powers under the Scheme in relation to the adjudication process, does not raise a class issue (beyond the fact that it has

As to (c) in paragraph [77] above, one aspect of the Lock-Up Agreement, which was advanced (if at all) only tangentially at the Convening Hearing, has since then caused me some further pause for thought. This is whether the fact that the Wentworth Group, as well as the Senior Creditor Group, have agreed not only to support the Scheme but also to accept the Settlement Premium in respect of all Higher Rate Claims (rather than seeking to certify their cost of funding) signifies or entails that their rights as against the company now are different from those of other Higher Rate Creditors, and could be said to make it impossible for them to “consult together with a view to their common interest” (the basic principle as classically stated by Bowen LJ in Sovereign Life Assurance v Dodd [1892] 2 QB 573 at 583) since they no longer can participate in the adjudication process, and thus have no interest in it or in discussing it. I have added to my consideration of this point the potentially linked fact of the agreement between Wentworth Group and the Senior Creditor Group (but not the Administrators or LBIE) for the payment by Wentworth Group companies of a fee of £35 million. I have concluded, however, that these matters do not unsettle the class composition, principally because the Lock-Up Agreement does not, on my analysis, remove the common rights of all the Higher Rate Creditors, but simply commits Wentworth Group as to which of two ways of exercising that right it will choose. In my view, the fact of the agreement in advance as to which of two options offered under the Scheme in respect of the right to select does not signify any material divergence of relevant right, any more than a firm internal and unexpressed election on its part (such as all such Higher Rate Creditors had to make before voting), without binding commitment or agreement, would do so. Furthermore, I do not consider that this precontracted choice is such as to prevent constructive discussion of the

I need add little more to what I have already said about the consent fee (see (d) in paragraph [77] above). In the end, the point was pursued principally in correspondence on behalf of GSI and was presented clearly and sharply as follows in a letter dated 8 June 2018 from Cleary Gottlieb to the

I have again considered, in relation to (e) in paragraph [77] above, whether the fact that some provable debts are not legally owned by the Senior Creditor Group, but are ultimately controlled by one or more members of the Senior Creditor Group (for example, through a trust structure or a sub-participation arrangement) ought to have required the holders of such claims to vote in a separate class. Again, I remain of the view that this is not the case. For the purposes of class composition, the relevant “rights” are the rights of the legal owner of the relevant claim. The fact that the legal owner of the claim may be required to vote in accordance with the instructions of a third party (e.g. a beneficial owner or sub-participant) is not relevant to class composition: see Re Zodiac Pool Solutions SAS [2014] BCC 569 at [21] (Morgan J) and Re Abbey National plc [2004] EWHC 2776 (Ch) at [4] and [13] (Evans-Lombe J). The scheme company’s contractual relationship is with its legal creditors, and it would be unworkable to compose classes by reference to the position of third parties who may be able to control the exercise of the legal creditor’s voting rights. The involvement of such third parties may be relevant in assessing the fairness of the scheme at the Sanction Hearing, but I do not consider that it is relevant for the purposes of class composition.

In summary, after careful review, I have remained satisfied that the class meetings proposed, and approved, convened and held, were properly

However, that is the basis of the Court’s jurisdiction but it does not conclude the inquiry (see per Street J in Re Jax Marine Pty Ltd and Companies Act 1961 [1967] 1 NSWR 145 at 147 (lines 25 to 27)): for conflicting interests or motives may be highly relevant at the second stage of considering whether, as matter of discretion, to sanction the scheme. That is the stage of assessing whether the class was fairly represented at the meeting, to which I now turn.

Again, the main focus at this second stage is on the Higher Rate Creditor meeting. Neither the SCG Meeting nor the Subordinated Creditor Meeting, where all those Scheme Creditors entitled to vote did so in favour, nor the 8% Creditor Meeting, where the requisite majorities would have been obtained by a substantial margin even if Wentworth Senior Creditors had been excluded from it, are in issue.

The issue arises in respect of the Higher Rate Creditor Meeting principally because (as the Cleary Gottlieb e-mail referred to in paragraph [53] above emphasised) the votes of the Wentworth Senior Creditors were necessary for the approval of the Scheme by the requisite 75% majority in value at that meeting. (As explained above, if the Wentworth Senior Creditors had been excluded from the Higher Rate Meeting, the Scheme would have been approved by 62 creditors, representing 93.9% in number and 62.2% in value.)

As also mentioned previously, the principal objector at the Convening Meeting, Deutsche, did not pursue its arguments at the Sanction Hearing; and (Cleary Gottlieb having expressly confirmed in their letter of 8 June 2018 that GSI did not propose to be represented at the hearing or to serve any evidence or submissions in relation to it) there was no one who appeared before me to elaborate adversarially the argument that, even if not improperly constituted for the purposes of the first stage of assessment, nevertheless the Higher Rate Creditor class was not fairly represented at the Higher Rate Creditor Meeting. That does not, however, excuse the Court from its task of assessment, even if dialectic argument might have assisted it.

The questions at the heart of the matter at this stage are (a) whether the majority creditors had some ‘special interest(s)’ different from and adverse to the other members of the Higher Rate Creditor class by which it is shown (b) they were predominantly motivated in voting as they did; if so, (c) whether their votes are to be (i) disregarded or (ii) discounted, and (d) what effect that should have in terms of whether or not the Court should decline to sanction the Scheme. I shall first discuss these tests in general, and then come on to apply them in this case.

I agree with Counsel for the Administrators that the mere fact that the majority creditors have a special interest for supporting the scheme does not, without more, entail that the class was not “fairly represented”. As appears from Plowman J’s formulation of the guiding principles in Re National Bank Ltd (see paragraph [65] above), the concern is whether the relevant creditors have a special interest which is adverse to, or clashes with, the interests of the class as a whole. A special interest which merely provides an additional reason for supporting the scheme (without clashing or conflicting with the interests of the class as a whole) does not undermine the representative nature of the vote. This is well established in the authorities both before and after National Bank Ltd. Thus, for example:

Further, and particularly as to (b) in paragraph [89] above, I agree also with Counsel for the Administrators that the bare existence of an adverse interest is not enough to impugn a creditor’s vote as being unrepresentative of the class.

As Counsel for the Administrators also pointed out, the commercial affairs of sophisticated creditors, particularly where the creditors are hedge funds or global financial institutions, are often so complex and interconnected that any given transaction will throw up a whole host of potential conflicts between them. It would be highly unsatisfactory, and in reality impracticable, if the need to establish the dominant causative reason why a relevant creditor supported the scheme required assessment of that creditor’s subjective state of mind. An objective test is required.

In Apcoa, my suggestion was as follows (at [130]):

“if an allegation is made that a creditor had improper regard to interests other than those of the class to which he belonged, it is necessary for there to be a ‘but for’ link between the collateral interest and the decision to vote in the way that he did. The person challenging the relevant vote must therefore show that an intelligent and honest member of the class without those collateral interests could not have voted in the way that he did.”

Although this ‘but for’ test was approved and applied by the Grand Court of the Cayman Islands in Ocean Rig at [122], it has elsewhere been doubted, especially (and recently) in Re Boart Longyear Ltd (No 2) (2017) 122 ACSR 437 at [134], where it was submitted (incorrectly) that the causal analysis stated in Apcoa was “in the nature of obiter dicta” and, without deciding the point,

In submissions before me, Counsel for the Administrators supported the ‘but for’ test; but I think it fair to characterise the submissions of Counsel for the Senior Creditor Group (supported by Counsel for Wentworth Group) as more nuanced in this regard. On behalf of the Senior Creditor Group, Mr Dicker QC in his oral submissions put it this way: “So far as stage 2 is concerned, the phrase used by Plowman J was whether the statutory majority are acting bona fides not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent. In our submission, one needs to have regard to that phrase as a whole. It is a unitary concept, essentially: Were they voting with a view to the interests of the class or not? The reason you asked that question is that, having at class stage allocated creditors by reference to their legal rights, what weight do you put on their votes when it comes to the sanction hearing, when deciding how to exercise your discretion. In our submission, the answer to that will often depend critically on the facts, including the precise nature of the collateral interest. So, for example, if the interest is adverse, one may say, "Well, actually, I am not going to put much weight on the fact they voted in favour in deciding whether or not to exercise the court's discretion to sanction the scheme." Conversely, if the interests are aligned, again, depending on the facts, one may put a lot of weight, not so much weight on the votes that they have expressed, depending on the nature and extent of the collateral interest. So, in our submission, the result is likely to be in most cases the same as that advocated for by Mr. Trower. However, in our respectful submission, it might be preferable to preserve as it were a little bit of flexibility reflecting the fact that ultimately this is a question of discretion for the court and unlikely to be capable of being reduced to a sort of rigid flow diagram of analysis.”

I unhesitatingly agree that the discretion of the Court should not be circumscribed by inflexible rules; and certainly that was not my intention in adopting a ‘but for’ test in Apcoa. Rather, I intended to illustrate that to show that the vote was the product of a creditor’s special adverse interest such as to make the result unrepresentative of the class the creditor’s adverse interest must be shown to be what impelled it to vote as it did.

The problem to be addressed is in distinguishing between an adverse interest and an additional one in circumstances where commercial creditors may be expected to have a variety of additional interests which may be in competition, but which are not the dominant causative reason for casting a vote one way or the other.

In that context, it is, to my mind, important that at the second stage what the Court is guarding against is coercion of a class by a self-interested majority within it voting in its perception of its own interests rather than the class interest (see, for example, Alabama at 239); and that the authorities do seem to make clear that at this stage the question is not whether one or more creditors had, in voting, an interest not enjoyed by others and adverse to them which could or even would have had a material bearing on the voting creditor’s point of view; it is whether the voting creditor’s special interest is adverse to, or even inconsistent with the interests of the class, and in objective reality the factor which caused the creditor to vote as it did.

In Dee Valley, Sir Geoffrey Vos C. went on (after the passage quoted in paragraph [90(2)] above) to say this (at [47]):

“I have therefore concluded that members voting at a class meeting directed by the court must exercise their power to vote ‘for the purpose of benefiting the class as a whole, and not merely individual members only’: see Viscount Haldane’s formulation in the British America Nickel case [1927] AC 369, 371. I am not sure that the gloss suggesting that members at such a meeting must not vote for extraneous reasons is helpful. The key is that the members of the class must vote in the interests of the class as whole and not in their own specific interests if they are different from the interests of the class.”

British American Nickel (in the Privy Council) is also interesting. The question on appeal concerned the validity of a vote by the majority debenture-holders to bind a minority under the terms of the debenture. One of the debenture-holders (Mr John R Booth) was induced to vote in favour of the scheme by a promise of receiving US$2m in ordinary shares. His vote was necessary to secure the majority. On the evidence, the judge (Kelly J in the Supreme Court of Ontario) held

“the votes neither of Mr Booth nor of the British Government would have been given for the scheme had they been influenced only by what was most in the interest of the bondholder.”

As it strikes me, that formulation is similar to the “but for” test in Apcoa. The focus is on whether the special interest in question is the only, or at least the deciding, factor.

In British American Nickel the Privy Council upheld Kelly J’s approach. Viscount Haldane LC stated as follows (at 371):

“[The votes] must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only.”

(emphasis added)

In summary, and whilst wary of any exclusive or binary test and not intending to suggest any mechanistic restriction on the discretion of the Court at each stage, I continue to think that with suitable caution or nuance in its application, the ‘but for’ test may be helpful in conveying the extent to which the special interest must be demonstrated to be an adverse one before the vote of a member of a class at a duly constituted class meeting is to be discounted or even disregarded. As it was put in the Administrators’ skeleton argument, “the ‘but for’ test is a useful heuristic for determining whether the causal link exists.”

In the application of such a test, or a nuanced version of it, two important and inter-linked considerations are, and, as it seems to me, usually will be, (a) whether other creditors without the special interest have, apparently reasonably, approved the scheme proposed as being in their interests as members of the class concerned and (b) whether having regard to what would be the position if there were no scheme there is more to unite the members of the class than divide them.

The first speaks for itself: if creditors in the class without the special interest have, on an informed basis, voted in favour of the proposed scheme that further supports the conclusion that the majority had the interests of the class in mind, and not merely their own.

As to the second issue, the ‘comparator’ is always very important at both the second and the third stage, as was recognised as long ago as the decision in In re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 415, though it should not be used as “a solvent for all class differences” even in a context where the alternative is insolvent winding-up or its real likelihood (which will destroy value and negate any real economic value in the competing interest): see Apcoa (No 2) at [117].

It is important also, I think, to recognise that whilst the class meeting is comprised of those having the same or sufficiently similar legal rights against the company, the interests in play may not be limited to but rather may transcend the class right, and any special advantage as regards a particular class right may need to be weighed against the overall benefits to be obtained under the scheme proposed. Thus, even if perceptions may differ acutely as to the separate class interest, and/or some members of the class enjoy a special interest or an overall advantage relative to others in the class, the broader interests that members of the class have in common may neutralise or displace any suggestion of a coordinated majority having voted in order to obtain the special interest or advantage. The critical question for each Scheme Creditor is whether it is content with the overall “deal” which the Scheme represents. Albeit in rather different circumstances of apparently imminent insolvency, this was the point I sought to make in Apcoa (No 2) at [116].

The final issue in this context is as to what the effect would be if the Court were to conclude that a creditor’s special interest was the dominant causative reason for it having voted in favour of a proposed scheme, and in particular, whether the Court could in its discretion nevertheless sanction the scheme.

It is the passing of resolutions by the requisite statutory majorities at properly composed and constituted class meetings duly convened and held which gives the Court jurisdiction on application made to it pursuant to Part 26 of the CA 2006 to sanction a scheme. Unless the ‘special interest’ is such as to demonstrate some flaw in the class composition, the Court retains that jurisdiction even if it is established that a vote at a class meeting was unrepresentative of the class.

In such circumstances, the Court may either (a) discount the weight given to the majority vote and consider the fairness of the scheme without adopting any particular presumption in favour of the majority or (b) altogether disregard the relevant votes of ‘special interest’ creditors so that the relevant votes are void, and do not count at all towards the statutory majority, in which case if the requisite majorities are not achieved the scheme must fail.

The distinction between “discounting” and “disregarding” a vote is apparent from a number of authorities:

As to the exercise of the Court’s discretion in this respect, the Administrators submitted that since the effect of disregarding the ‘special interest’ creditor’s vote is effectively its disenfranchisement, and since (they submitted) if the Court were too ready to disregard a creditor’s vote on the grounds of a special interest, then the test for class composition would be undermined (since a creditor could be excluded from the class meeting by reason of his interests rather than his rights), and ‘special interest’ creditors would always be disenfranchised, wholly disregarding the vote should be the last and most unusual resort. I am not persuaded by this line of argument. I would not agree that there is or should be such a hierarchy of response: but if one were required, if anything I might reverse the approach. The Court has always been, and should always be, especially disposed to guard against coercion of a minority by a self-interested majority. I would prefer to leave it that the discretion is to

I turn to the application of these principles and guidelines to their application in the present case.

To quote the Administrators’ skeleton argument for the Sanction

Nevertheless, the Administrators submitted that none of this creates any impediment to the sanction of the Scheme, and in particular that:

More generally, the Administrators sought to emphasise what they presented as being “the fundamental fact” that all of the Scheme Creditors, including all of the 8% Creditors, the Higher Rate Creditors and the Subordinated Creditor, share a collective interest in facilitating the speedy distribution of the Surplus; that is the principal purpose of the Scheme; and that it thus affects all creditors in a similar way.

I agree with the Administrators that it is important to have in mind the overall purpose and effect of the Scheme. That is especially so in this case because the context of the debate as to class composition and fair representation of the class tends to focus attention very much on the loss by objecting creditors of their rights of appeal in the Waterfall IIC application, and to obscure in consequence both the exposures to which the holders of such rights are also subject and the overall benefits of early resolution.

The Scheme is a multi-faceted commercial compromise of considerable complexity, with ‘give and take’ on all sides. The exact balance between the parties is probably impossible accurately to establish, just as are the prospects in the various applications described compositely as the Relevant Proceedings. Lehman debt has been actively traded, especially given the high rate of interest it attracts, and the position as to sub-participatory, hedging and cross-holdings is as a practical matter likely to be complex, changing and less than transparent.

The essential or overall deal was and remains that in return for giving up the possibility of establishing a greater quantum of interest on appeal, creditors obtain the advantage of a speedy mechanism to return the Surplus, stemming the continuing loss of the time value of money, free of the costs of continued litigation and any benefit or burden in consequence of the Relevant Proceedings.

These include the possibility of a successful appeal to the Supreme Court in the

There is no reasonable doubt that in the absence of the Scheme, the Administrators would be unable to distribute the Surplus for an indeterminate but almost inevitably lengthy period. As previously explained (and see paragraphs [10] and [11] above especially), material delay is inherently and inevitably prejudicial to all creditors: it would lead to a continuing loss of the

Whenever the trade or compromise is between an uncertain right or obligation and actual payment the quantification of the benefit or detriment is largely subjective; and the problem is exacerbated by the fact that the amounts in play in respect of different creditors is both variable and uncertain. It is necessary at this second stage to assess not the balance of advantage but whether there is some factor or reason to suppose that one set of Higher Rate Interest Creditors has an interest adverse to the interests of the others in the class.

I consider it fair to focus primarily in this assessment on the way in which the remaining Objectors contend that there is such an adverse interest. I have previously quoted from the letter sent by Cleary Gottlieb on behalf of GSI to the Administrators dated 8 June 2018: see paragraph [81] above. As already noted, the substance of the objection is that the Senior Creditor Group is being paid “at least £35 million”

“in consideration of it not pursuing the Waterfall IIC appeal”, whereas GSI is simply being stripped of the right “without compensation”. Insofar as this point was intended to suggest adverse interest, the short response is (as will already be apparent) that in light of the emergence of the arrangements for the payment to them, the Senior Creditor Group was not included in the Higher Rate Interest creditor class and was placed in a class of its own.

I accept that that may not be a complete answer, given the suggestion floated (by Cleary Gottlieb in its email dated 13 June 2018 provided to the Court during the course of the Sanction Hearing (see paragraphs [53], [59] and [87] above) that the Senior Creditor Group may control some other members of the Higher Rate Creditor class; but it is in my view sufficient given that there was never any demonstration of that floated suggestion.

As also previously noted, during the course of the Sanction Hearing Cleary Gottlieb advanced further points that may be thought relevant at this second stage, now concerning the interests of the Wentworth Group entities: see paragraph [53], [59] and [87] above. Although not elaborated on behalf of GSI (or, so far as I am aware, even mentioned by Cleary Gottlieb in its correspondence prior to the Sanction Hearing) this struck me as a stronger point than the one as to the Senior Creditor Group which it primarily advanced, since the interests of Wentworth Senior Creditors as a Higher Rate Creditor are plainly in competition with GSI in relation to the particular issue focused on by GSI, the Waterfall II Application, as simply demonstrated by them being ranged against each other (albeit as quasi-representative parties) in those proceedings. This initially (and intermittently thereafter) caused me some real concern.

However, it is important again to return to the question: which is whether the interests of Wentworth Group have been shown to be, or are objectively likely to be, contrary to the interests of the relevant class in which their vote had influence in relation to the question really before the class as such: whether to accept the give and take of the Scheme as a whole.

Now as regards that question, as it seems to me, the competition between GSI and Wentworth Group as litigants in the Waterfall IIC Application is substantially beside the point. There is enough Surplus to cater for victory on appeal for GSI without impacting on Wentworth, unless Wentworth Groupwould garner more from GSI’s claims being compromised in some other way. That is why, no doubt, Deutsche, who did always advance this point until they withdrew their objection, focused on the Wentworth Group Sub-Debt interest as the feature giving the Wentworth entities as a whole what was said to be a special interest adverse to the class (since recoveries in respect of the SubDebt would be enhanced by the reduction of Higher Rate interest claims).

I would be disposed to accept that this is not only a special interest (as is accepted indeed by the Administrators, as previously noted) but also, if all the Wentworth Group entities are treated economically as one, as being ‘adverse’ to some in the class, and to the class as a whole in the sense that it is not an interest which is enjoyed by any other members of that class.

However, I do not accept that, even on that basis, it is demonstrated or likely that this was the dominant or causative reason for the support given by the Wentworth Group entities to the Scheme. As the Administrators have pointed out, the Wentworth Senior Creditors own some 38% of all provable claims. They have an obvious and very significant interest in ensuring, if that can be done, that statutory interest is distributed quickly and properly, and that any potential for the ‘lacuna’ identified by the Supreme Court (such that, if LBIE moves from administration into liquidation, any unpaid statutory interest under rule 14.23(7) in respect of the period between the commencement and the termination of the administration would not be payable out of the Surplus or provable in the liquidation) is removed (see paragraph [21(4)] above).

Further, subject to the issue raised late as to the control over others in the class that it is suggested that either Wentworth Group or the Senior Creditor Group may have, the conclusion that it is not (or not so much) the ‘special interest’, but the principal objectives of the Scheme as a whole, which explains why

Thus, excluding the Wentworth Senior Creditors, 62 Higher Rate Creditors – representing 93.9% in number and 62.2% in value of the Higher Rate Creditors – have voted in favour of the Scheme. Of those 62, the majority have accepted the Settlement Premium, but a nontrivial minority of creditors (6 in total) have elected to certify their cost of funding. Indeed, two sophisticated Higher Rate Creditors – CRC and Marble Ridge – are in precisely that position, and (though they previously opposed) now support the Scheme. I would accept the submission that it cannot credibly be suggested that the position taken by CRC or Marble Ridge (or any of the other 62 Higher Rate Creditors who support the Scheme) is an irrational one.

In all the circumstances, I do not therefore consider that the votes at the class meetings were unrepresentative of the class interest, nor that coercion has been demonstrated.

Even if I am wrong and it is thought that the class meetings were unrepresentative, I would also accept that, in all the circumstances of the case, it would not be right to disregard the votes of the Wentworth Senior Creditors as being unrepresentative of their respective classes, and to conclude accordingly that the Scheme must fail for want of sufficient majorities for the purposes of the statutory requirements. It would not be right to treat the vote as the independent view of the regiment such as would ordinarily (in the absence of any ‘blot’) be the litmus test of a scheme’s commercial good sense and fairness of a scheme. But nor would it be right entirely to disenfranchise and negate the views of a majority member of a class which is the largest creditor group in the LBIE estate and which, even ignoring its special interest, has, in common with many others, much to gain from the fulfilment of the central purpose of the Scheme as proposed and perceived by the Administrators.

In that context, I consider that the fact of support by a solid majority in number having claims with a value of over 60% of the total is an important factor, distinguishing this case from, for example, one where there is no real indication of general class support either in numerosity or value terms.

However, if that is the (as it were) potentially saving grace of the Scheme, the onus on the proponents of the Scheme to persuade the Court of its overall fairness is all the greater.

Many, if not most, of the matters to be taken into account in considering, at this third stage of the Court’s assessment of the Scheme, whether “the arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest might reasonably approve”, have already been addressed in the context of the two earlier stages. However, whilst more usually the Court has the guide (and the reassurance) of a regiment of commercial men marching in step, in this case, the differences in view, and the issues as to ulterior purposes objectives, do invite more anxious scrutiny of what appears to be the minority position.

A useful checklist for this purpose is provided by the objections put forward by Deutsche in its solicitors’ letter of 5 June 2018. Although, in the event, Deutsche did not pursue these objections and confirmed (on 11 June 2018) that it did not intend to be represented at the hearing and, having secured the Administrators’ agreement to a contribution to its costs, “does not object to the court’s sanctioning of the scheme, should the court see fit to do so”, its objections were adopted by another Higher Rate Creditor, namely SRM, as previously explained (see paragraph [16] above). SRM was one of the four Higher Rate Interest Creditors which voted against the Scheme.

By letter to the Administrators dated 12 June 2018, SRM especially identified as its “principal reason for its objection to the Scheme” two features of the Certification procedure, being (a) Wentworth’s special rights of consultation and (b) the provision for the surrender of SRM’s “right to the supervisory control of the Court in respect of Certification”. I shall return to these later, in

Deutsche’s first objection was as follows:

“Higher Rate Creditors who control a number of different Claims should be able to take the Certification Option for some of those Claims and the Settlement Option for others. The merits of pursuing the Certification Option for ISDA claims will, absent any other considerations, be entirely fact and circumstance specific to each relevant payee. Creditors should therefore have the freedom to exercise different options in respect of their different claims, and not be subjected to the unfair penalty of being deprived of the 2.5% premium for claims which they would otherwise not certify, simply because a Creditor elects to pursue its legitimate rights of certification in respect of other claims.”

In short, Deutsche proposed that a creditor holding two claims should be able to receive the Settlement Premium for one claim and pursue the certification route for the other claim.

This was, in effect, a suggestion for what was presented as an improvement to the Scheme. Although there is reference to it being an “unfair penalty” to be deprived of the 2.5% premium for claims that they would not certify simply because they are required to make an election across the board of their claims, as if this was a prejudicial defect, that is something of a misplaced forensic flourish. There is no unfair penalty: the Settlement Premium is offered in consideration for the relevant creditor agreeing to spare LBIE the time and expense of dealing with a certification. If a creditor holding two (or more) claims were permitted to “cherry pick” in this way, it is obvious what would happen. Each creditor would choose the Settlement Premium for claims with a comparatively low cost of funding, and would choose the certification route for claims with a comparatively high cost of funding. That would not achieve the cost or time savings that the Settlement Premium is designed to secure. There is no unfair prejudice; and the ‘solution’ proposed would have destroyed the rationale of the proposal.

Deutsche’s second objection, which GSI continued to press in Cleary Gottlieb’s letter dated 8 June 2018, was as follows:

“As it stands, the Scheme provides no form of compensation for the loss of appeal rights against the Waterfall IIC judgment. Whether equivalent to the £35m ‘consent fee’ payable to the SCG or otherwise, such compensation should fairly be paid to all Higher Rate Creditors.”

I accept that this was and is a point of substance; however:

Deutsche’s third objection was as follows:

“Higher Rate Creditors which take the Certification Option should not be effectively subordinated to Specified Interest Creditors, those with 8% Interest Claims and those Higher Rate Creditors which take the Settlement Premium Option through the delay in payment. Higher Rate Creditors which take the Certification Option should be paid the minimum of 8% simple interest at the same time that all other interest is paid by the Company (provided, of course, that the Company has sufficient funds to do so), with only payment of any excess arising from the Certification process deferred.”

It is true that, where a Higher Rate Creditor elects to certify, that creditor will only receive payment of statutory interest once the certification process is complete. That is because the creditor’s statutory interest entitlement will not be determined until the certification process has concluded. The burden of Deutsche’s suggestion was that such a creditor should be paid the minimum amount of statutory interest up front (as an interim distribution), with the balance (if any) payable upon the completion of the certification process.

Again, this was not so much a point of alleged unfairness, so much as a

Deutsche’s fourth objection was as follows:

“The Wentworth Group should have no right to be informed of Certification Claims or to be consulted by the Company on those Claims. Certification

Claims should be confidential as between the Certifying Creditor and the Company, whose Joint Administrators should approach the Claims in good faith and in a manner consistent with their obligations as officers of the court.”

This objection did cause me some concern. It is uncomfortable to give any creditor some special status, even if carefully controlled, as regards the proof of another creditor; and the fact that the creditor in question (the Subordinated Creditor) has a considerable interest is no real answer. However, my concern is not such as should in my view upset the Scheme.

In particular:

Deutsche’s fifth objection was as follows:

“If the Company rejects a Certification Claim, the Company should give reasons why it is doing so. Only then will the Certifying Creditor know what case it has to meet should it wish to take the Claim further and, if so, what additional evidence it should provide to the Adjudicator.”

As to this, in my view:

Deutsche’s sixth objection was as follows:

“If the Company rejects a Certification Claim and the Certifying Creditor does not accept the Company’s decision, the Claim should be referred to one of the Adjudicators identified (acting as an expert). If none of those named is available, a replacement should be agreed between the

Certifying Creditor and the Company, without reference to the Wentworth Group. Whilst the Adjudicator should uphold a Certifying Creditor’s claim unless made in bad faith or irrationally, the Adjudicator should not be obliged only to choose between, on the one hand, the amount certified and, on the other, the statutory minimum or the Company’s counter-offer. If the Adjudicator does not uphold the Certifying Creditor’s claim but considers that, on the evidence presented to the Adjudicator (including evidence requested by the Adjudicator), another sum would be appropriate, the Adjudicator should be free to award that other sum. The Adjudicator should also be free to hold an oral hearing if the Adjudicator considers it appropriate, and should give brief reasons for his or her decision.”

As Counsel for the Administrators noted in their skeleton argument, this sixth objection amounted to a re-writing of the adjudication process as provided for in the Scheme, as if that was required to rehabilitate the adjudication process. I agree with the Administrators that the adjudication Scheme is not such as to cause the Scheme to fail: some would think what Deutsche proposed an overall improvement, others not; but the

I accept that there is nothing in the adjudication process which causes the Scheme to fall below this threshold. This seems to me to be broadly confirmed by the voting. Out of the 9 Higher Rate Creditors who have elected to certify their cost of funding (and who could therefore be subject to the adjudication process in the future), 6 voted in favour of the Scheme (2 voted against and 1 abstained). The Administrators confirmed that none of the six is a member of the Wentworth Group or the Senior Creditor Group, and two of them (Marble Ridge and CRC) previously opposed the Scheme at the Convening Hearing.

As to the specific points originally raised by Deutsche:

Deutsche’s seventh and final objection was as follows:

“The Certifying Creditor should be able to take the matter to the court if the Adjudicator has made a manifest error, has made an error of law or has reached a conclusion that no reasonable Adjudicator could have reached.”

This was a variation on the same theme as its earlier objections; but it chimes also with SRM’s particular concern as to the “surrender” of “its right to the supervisory control of the Court” (see paragraph [138] above).

The concern is natural: and where rights of recourse to the Court are to be removed or restricted, not by private agreement but by virtue of a scheme which compels consent at the instance of a statutory majority, it is of heightened importance that it not be minimised, and that the substitute for legal recourse in the Courts should be robust, satisfactory and justified. However:

In the round, I have been persuaded that the certification and adjudication processes instituted by the Scheme are such as could reasonably be approved by commercial men acting in their own interest and aware of the potential for dispute in the areas designated to be subject to those processes; and that, in particular, though those processes are more “limited” (as SRM put it) than Court proceedings, they are not unfair, and they are justified by reference to the fundamental purpose of the Scheme.

I should also add that, in my view, the amendments introduced to the Scheme prior to the Scheme Meetings (see paragraph [39] above), which removed an earlier feature which conferred on the Subordinated Creditor the right to determine the amount of any counter-offer, were certainly appropriate and probably necessary. I had considerable reservations as to the earlier provisions, and well understood the objections to them.

Even the reduced role of the Subordinated Creditor now provided for has given me some concern: my instincts were against giving any particular role or platform to the Subordinated Creditor so as to enable it, without colour of office or being subject to any duties, to intervene in another person’s claim simply with a view to its own interests.

However, the position of the Administrators is clear: they consider that involvement appropriate and would also, even apart from such provisions, have expected to consult with the Subordinated Creditor on this matter as one affecting its commercial interests, recognising that it would also have been entitled to intervene in any legal proceedings relating to a disputed certification. That view is entitled to weight; and I have taken into account also the fact that not only has Deutsche withdrawn its objection, but both CRC and Marble Ridge, who actively opposed the Scheme previously and appeared through Counsel at the Convening Hearing to object to the class composition proposed, appear also to have been satisfied by the changes so that they voted in favour of the Scheme.

Although, therefore, I have carefully considered SRM’s continued objection on this score, and its over-arching point that “the Certification Option and the associated Adjudication process appear to be designed to discourage Higher Rate Creditors from challenging the Administrators’ (and Wentworth’s) view of its entitlement to Statutory Interest” so as to be “particularly unfair for Higher Rate Interest Creditors in dispute with the Administrators as to their entitlement to Statutory Interest under the Certification Option”, I have concluded that I should not regard this revised feature or any remaining aspect of the certification and adjudication processes as such as to cause me to refuse sanction of the Scheme.

Having considered these specific objections, I have also sought to stand back and consider the matter in the round. In any scheme such as this where the assessment of the comparator is to a large degree a matter of subjective judgement, and will inevitably affect different creditors differently, in contrast to the comparator of imminent, insolvent liquidation where value destruction is objectively inevitable, the balance to be struck is less straightforward. In the context of this Scheme, moreover, the cross-holdings and conflicting interests are obvious and substantial.

Nevertheless, in my judgment, the benefits overall of the Scheme are also obvious; and they are considerable. The certainty that delay will occasion substantial loss in terms of statutory interest is perhaps the most important fact in the matter.

In the round, I have concluded that there is no unfairness such that the Court should decline to give its sanction to the Scheme.

This is not a scheme such as that devised for and sanctioned in the case of Apcoa where there is a preliminary question as to whether there are sufficient connections between the scheme company and this jurisdiction to attract the jurisdiction of the Court and warrant its exercise. LBIE being an English company there is no need to demonstrate some other “sufficient connection”.

Nor is there any concern in this case as to any limitation or restriction on the scheme jurisdiction of this court such as is sometimes argued there may be in the context of a body corporate with its Centre of Main Interests (“COMI”) in another EU member state and no establishment here (though it is to be noted that the English court has not considered that an impediment in a number of decided cases): see, for example, In re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus LR 1245; In re Magyar Telecom BV [2013] EWHC 3800 (Ch), [2014] BCC 448; and In re Van Gansewinkel Groep BV [2015] EWHC

However, not all LBIE’s creditors are domiciled in the United Kingdom and the effect of the Scheme on them, and the international effectiveness of the Scheme generally, are plainly matters to be considered.

Two principal matters need to be addressed: (i) the impact of the Recast Judgments Regulation; and (ii) whether the Scheme will be given and achieve substantial cross-border effect.

Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Recast Judgments Regulation”) applies in “civil and commercial matters”. Chapter II deals with jurisdiction.

The basic rule underlying Chapter II is that any person domiciled in an EU Member State must be “sued” in the courts of that Member State: see Article 4(1). It has never been conclusively determined whether Chapter II of the Recast Judgments Regulation applies to some or all schemes of arrangement, although the matter has been considered in a number of cases (including those cited at paragraph [168] above).

There are two possibilities: either (a) that the jurisdictional requirements in Chapter II of the Recast Judgments Regulation are simply not applicable to English schemes of arrangement, or (b) that such schemes of arrangement do fall within Chapter II, so that the English Court must be satisfied that it can assume jurisdiction under one or more of the articles in that Chapter II.

As to (a) (in paragraph [173] above), there are a variety of arguments against the application of the Recast Judgments Regulation. The principal arguments are that:

Against these arguments, however, and in favour of the applicability of the Recast Judgment Regulation, the principal arguments are that:

As Snowden J noted In re Van Gansewinkel, the point is a difficult one. Moreover, there is an added complication in this case in that the Company’s administration does not fall within the Insolvency Regulation, because that

Rather than decide it, the approach adopted by the Court is to assume (without deciding) that the Recast Judgment Regulation applies and then determine whether jurisdiction could be found within its provisions. Especially having regard to the peculiar additional complications in this case (as above described) that indeed is the course I am invited to adopt now.

On that basis, the Administrators pray in aid Article 8 of the Recast Judgment Regulations as providing the necessary jurisdiction. So far as material, Article 8 provides:

“A person domiciled in a Member State may ... be sued ... (1) where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings”.

If at least one scheme creditor is domiciled in the UK, Article 8(1) has been invoked in many recent cases to establish that the English Court has jurisdiction to sanction a scheme affecting the rights of creditors domiciled elsewhere in the EU. See Re Nef Telecom BV [2014] BCC 417 at [43], where Vos J stated: “… if the Judgments Regulation applies because some of the creditors are to be regarded as defendants to the applications for sanction [of the scheme] then, where one of those defendants is domiciled in the United Kingdom, that gives the court jurisdiction under Article 6”.

This principle has been applied in a number of subsequent cases, including Re Magyar Telecom BV [2014] BCC 448 at [31] (David Richards J); Re Zlomrex International Finance SA [2015] 1 BCLC 369 at [15] (Mann J); Re Metinvest

Further, although in some cases, the Court has suggested that it may not be enough to identify a single creditor and should consider whether the “numbers and size of the scheme creditors domiciled in [the UK]” are “sufficiently large”: see Re Van Gansewinkel Groep BV [2015] Bus LR 1046 (Ch) at [51] (Snowden J) and Re Global Garden Products Italy SpA [2017] BCC 637 at [25] (Snowden J) that more restrictive view would cause no difficulty in this case. It is understood that approximately 11% by number and 5% by value of the Scheme Creditors with admitted claims are domiciled in England. (Footnote: ³) These figures are broadly comparable to the figures in Van Gansewinkel, and are sufficient (on any view) to bring the Scheme within Article 8.

Nevertheless, the Administrators have drawn to my attention that the application of Article 8 is, however, subject to two potential exceptions:

The solution proposed by the Administrators lies in Article 26(1) of the Recast Judgments Regulation, which provides that “a court of a Member State before which a defendant enters an appearance shall have jurisdiction”. In particular:

I accept this argument, and that pursuant to Article 26(1) the Court has jurisdiction, which it should exercise, to sanction the Scheme vis-à-vis any Relevant Employees or Relevant Jurisdiction Clause Creditors who have lodged a proof of debt in the Company’s administration.

Any Relevant Employees or Relevant Jurisdiction Clause Creditors who have not lodged a proof of debt in the Company’s administration are expressly excluded from the definition of “Scheme Creditor”, and are not bound by the Scheme. The Administrators confirmed to me that they consider that it is unlikely that there are any, or any substantial, creditors falling within those categories who have failed to submit a proof of debt in the administration. That is readily understandable in the context of an administration which commenced almost a decade

I need not therefore decide the difficult questions otherwise raised in relation to Relevant Employees and Relevant Jurisdiction Clause Creditors.

Having regard to the general principle that the English court will not act in vain or make an order which has no substantive effect or will not achieve its purpose, and echoing Sompo Japan Insurance Inc v Transfercom Ltd [2007] EWHC 146 (Ch) at [18]-[20] and Rodenstock at paras. 73 to 77, in Re Magyar at [16], David Richards J said:

“The court will not generally make any order which has no substantial effect and, before the court will sanction a scheme, it will need to be satisfied that the scheme will achieve its purpose.”

However, the principle does not require either worldwide effectiveness, or certainty. Thus, it does not require that the Court must be satisfied that the scheme will be effective in every jurisdiction worldwide: its focus is on jurisdictions in which, by reason of the presence there of substantial assets to or because of which creditors might make claims, it is especially important that the scheme be effective. Further, and as Snowden J explained in

Thus, in Sompo, when sanctioning an insurance transfer scheme under the Financial and Market Act 2000 (which is analogous in the context), David Richards J said this:

“[17] My principal concern, when the application was first before me on 14th December 2006, was to understand the true impact, if any, of the proposed transfer on the business … What, if any, effect will the transfer have if proceedings against Sompo were brought in those jurisdictions where it did have substantial assets? Would the transfer be recognised in those jurisdictions? If not, what purpose would be served by the transfer?

[18]

It was relevant, therefore, to have some evidence as to the proportion of the transferred policies which were governed by English law or other UK law and, particularly if the proportion were small, to have some evidence as to the effect of the transfer in Japan and perhaps other jurisdictions where Sompo has substantial assets.

[19]

If it appeared that the transfer would have little or no significant effect, it raised an issue as to whether in its discretion the Court should sanction the transfer. It is established that, on comparable applications under the Companies Act 1985, the Court will not act in vain …

[26] Overall this evidence leaves me less than convinced that the scheme once sanctioned will definitely be effective as regards proceedings in foreign jurisdictions to enforce claims under policies which are governed by foreign law, although I acknowledge that it provides a proper basis for concluding that it may well be so effective in Japan and the United States. More importantly, as I have mentioned, the evidence establishes that over 27% of the policies in number and by reference to reserves are governed by English law, and it is reasonable to suppose that the transfer will be effective in any relevant jurisdictions as regards those policies. The proposed scheme will therefore achieve a substantial purpose. The fact that the scheme also extends to a larger class of business not governed by English law is not, in my judgment, a good ground for refusing to sanction the scheme. Whether the scheme is recognised as effective in Japan or the United States or elsewhere will, if necessary, be tested in due course in proceedings in those jurisdictions.”

The Administrators submitted, and I agree, that the present case is stronger than Sompo: it is difficult to see how creditors could enforce their statutory interest entitlements in the English administration of an

Nevertheless, and as previously mentioned, LBIE has applied to the US Bankruptcy Court for an order recognising the Scheme as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code. The Administrators consider this to be a prudent course of action, due to the fact that there are a number of US-domiciled Scheme Creditors with claims under contracts governed by New York law, and because certain assets belonging to LBIE are situated in the US. The hearing of the application was due to take place on 19 June 2018: see Downs at paragraph 75. I do not know its result. However, in light of the matters set out above, the effectiveness of the Scheme is not conditional upon Chapter 15 recognition. Regardless of whether Chapter 15 recognition is sought or obtained, the Scheme will plainly achieve a substantial

I have considered the material sent to those interested in respect of the Scheme and the court process relating to it. I can see no ‘blot’ and none has been suggested (subject to the discussion of objections above).

As amended after the Convening Hearing, and with very minor amendments put forward to me and approved, I have been satisfied of my jurisdiction to sanction this Scheme, and that in my discretion I should do so. I made an Order accordingly.