SCHEMES OF ARRANGEMENT AND COMPANY VOLUNTARY ARRANGEMENTS

Richard Snowden QC

Erskine Chambers

1. The recent financial crisis has resulted in ever more complex and innovative attempts to use Companies Act schemes and CVAs. Recent cases have also exposed fundamental differences in the nature of these two procedures.

SCHEMES

2. Part 26 of the confers jurisdiction on the court to sanction a scheme of arrangement - that is, “a compromise or arrangement between a company and its members (or any class of them) or between a company and its (or any class of them).” A scheme requires the vote of a majority in number and 75% in value in each class meeting. If sanctioned by the court and filed at the companies registry, the scheme has effect by statutory force and will be binding on all members of the class whether or not they voted in favour.

3. There are two distinct elements of the process by which a court considers an application to sanction a proposed scheme of arrangement. The court must be satisfied (a) that it has jurisdiction to sanction the proposed scheme, and (b) that it is appropriate in all the circumstances to sanction the scheme in the exercise of the court’s discretion.

4. The first limb will include issues as to whether what is proposed falls within the proper scope and extent of the jurisdiction under Part 26, as well as questions of the proper constitution of the class meetings of creditors or shareholders. Jurisdictional issues are considered further below. So far as class questions are concerned, the test for whether members or creditors need to be placed into a separate class requires consideration of (i) their rights against the company in the absence of the scheme and (ii) the new rights to which they will become entitled under the scheme. In Sovereign Life Assurance v. Dodd [1892] 2 QB 573, Bowen LJ held that,

“it seems plain that we must give such meaning to the term “class” as will prevent the section being so worded as to result in confiscation and injustice, and that it must be confined to those persons who rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”

5. In making this assessment, the courts have been guided by commercial considerations and a desire not to frustrate the obvious utility of the scheme jurisdiction in suitable cases. So the court will generally not be keen to have a multiplicity of classes and will certainly not do so if that would give a small group of

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members or creditors a disproportionate right of veto. Moreover, where the alternative to a scheme is a of the company, then it is the rights which the creditors or members would have in that liquidation which is the appropriate comparator rather than rights against the company as a continuing entity: see generally Re Hawk Insurance [2001] 2 BCLC 480; Re BAIC [2006] 1 BCLC 665; Re Sovereign Marine & General Insurance [2007] 1 BCLC 228; T&N (No.3) [2007] 1 BCLC 563.

6. The second limb is sometimes referred to as the “fairness” test, but that can be misleading. In exercising its discretion, the court does not seek to test the scheme against its own concepts of fairness or even some objective measure of fairness. It recognises that shareholders and creditors are usually the best judges of their own commercial interests so that it is only generally necessary to check that the information provided to creditors was complete and adequate, and that the statutory majorities were properly representative of the class and were not in fact acting to promote interests adverse to the class whom they purported to represent: see Re Telewest Communications (No.1) [2005] 1 BCLC 752.

7. It is also usually said that the court has to be satisfied that the scheme is one that an intelligent and honest man, a member of the class concerned, and acting in respect of his own interest, might reasonably approve. However, if the information provided was sufficient and the majority vote was representative of the class, then it is difficult to see how a scheme could fail this latter test unless the court took the view that the majority had taken leave of their senses.

“Creditors”

8. There is no statutory definition of “” in Part 26 of the Companies Act. The key to identifying a person who might legitimately be subjected to a scheme is the existence or potential existence of a pecuniary claim owed by the company, which claim is to be satisfied from the assets of the company. There are, therefore, three types of creditor which are capable of being bound by a scheme:

(a) an actual creditor, being someone who is presently owed a sum by another;

(b) a prospective creditor, being someone to whom a sum will become payable in the future pursuant to a present obligation; and

(c) a contingent creditor, being someone to whom a sum may become payable in the future, dependent upon the happening of a future event.

9. However, a company can only properly propose a scheme which relates to the ambit of the company/creditor relationship. As David Richards J. said in Re T&N Ltd (No.3) [2007] 1 BCLC 563 at [45]:

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“The first and obvious point to make is that, whatever the precise meaning of a compromise or arrangement, it must be proposed with creditors or members of a company. It is implicit that it must be made with them in their capacity as creditors or members and that it must at least concern their position as members or creditors of the company.”

10. The jurisdiction is plainly not limited to schemes with unsecured creditors. Part 26 also permits a scheme between a company and its secured creditors. A charge or other security simply gives a creditor the right to have recourse to specific assets of the company to satisfy his debt in priority to other creditors. The security right is an integral part of the /creditor relationship between company and creditor, and hence a scheme can legitimately alter those security rights in the same way as it can alter other incidents of the debtor/creditor relationship.

11. That situation is to be distinguished from cases where an attempt is made to alter the rights and interests of third parties who are the beneficial owners of property held on trust by the company. The beneficial owners might be actual or contingent creditors of the company in respect of any claims for breach of trust, and a scheme could legitimately compromise or affect those rights. But, in contrast to assets over which the company grants security, assets held on trust by the company for third parties do not belong to the company. The beneficial owners have free-standing property rights which are independent of any debt owed by the company to them: those property rights cannot be the subject of a Part 26 scheme: see Re Lehman Brothers International (Europe) [2010] 1 BCLC 496.

12. The Courts have, however, been willing to extend the scheme jurisdiction to affect the rights of creditors not only in respect of their claims against the company but also in respect of claims against third parties such as guarantors of the company’s debt. In Lehman Brothers , Patten LJ said,

“It seems to me entirely logical to regard the court's jurisdiction as extending to approving a scheme which varies or releases creditors' claims against the company on terms which require them to bring into account and release rights of action against third parties designed to recover the same loss. The release of such third party claims is merely ancillary to the arrangement between the company and its own creditors….

It seems to me that an arrangement between a company and its creditors must mean an arrangement which deals with their rights inter se as debtor and creditor. That formulation does not prevent the inclusion in the Scheme of the release of contractual rights or rights of action against related third parties necessary in order to give effect to the arrangement proposed for the disposition of the debts and liabilities of the company to its own creditors. But it does exclude from the jurisdiction rights of creditors over their own property which is held by the company for their benefit as opposed to their rights in the company's own property held by them merely as security.”

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13. At least in relation to guarantees, it is easy to see why, pragmatically, it ought to be possible to require creditors of a company, as part of the compromise or arrangement of their primary claims against the company, to release guarantees that they might have in respect of the same debts. If pursued, a claim under such a guaranteewould give rise to a claim by subrogation by the guarantor against the company as principal debtor (sometimes called a “ricochet” claim). This subrogation claim would defeat the purpose of the compromise of the principal claim between company and creditor.The jurisdiction to require creditors to release such guarantee claims (and to authorise the execution of deeds of release on their behalf) has been expressly accepted in England in Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch).

14. A similar pragmatism has also been applied in the Cayman Islands to uphold the jurisdiction to require shareholders in a fund in liquidation to release claims that they might have for loss in respect of the value of their shareholding against third parties (such as the company’s advisers and officers) who would in turn be entitled to an indemnity from the company in respect of such claims. The essential point was that the claims required to be released were based upon precisely the same company/shareholder relationship as was the subject of the compromises under the scheme. To permit shareholders to provoke “ricochet” indemnity claims by third parties would defeat the purpose of the compromise of the principal claims between the company and its shareholders: see Sphinx Group (Chief Justice Smellie, 5 May 2010).

15. The point cannot, however, be pushed too far. The principles outlined above deal only with the scope of the scheme jurisdiction, not questions of class or fairness. For example, if only some scheme creditors had guarantees which they were required to release, and others did not, then depending on the strength of the guarantee claims and the guarantors, it might well be that such creditors should form separate classes when voting on the scheme. Or if the shareholders in the example given above had claims of very different amounts or strengths against different advisers, then class or fairness issues might well arise for consideration.

16. Some or all of these considerations will be relevant when considering the practice which has become increasingly prevalent of including a term of the scheme authorising the execution on behalf of scheme creditors of far-reaching releasesfor the directors, officers, employees, lawyers and other advisers of the scheme company from any and all liabilities not only in relation to the promotion of the scheme itself but also in relation to the affairs of the scheme companies more generally. Whilst seeking such releases may be understandable from the point of view of the proponents of the scheme, the potential impact of such releases is rarely at the forefront of the explanatory statement and is even less frequently the subject of judicial scrutiny: but see Telewest Communications (No.1) [2005] 1 BCLC 752 at [58].

17. The jurisdiction to sanction a scheme to compromise the claims of prospective and contingent creditorsis not in doubt. In Re T&N (No.3) David Richards J. affirmed that

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the scheme jurisdiction extended to compromises of claims which were prospective (e.g. claims for future rentals under a lease: see Re Cancol Ltd [1996] 1 All ER 37) or contingent (e.g. potential claims under a guarantee, or as a result of exposure to asbestos which would result in a tort claim arising if and when action harm was suffered).

18. This facility may provide a solution to an issue which frequently arises in relation to involving commercial notes. The problem is caused by the fact that, as a matter of law, most notes are held in global form by a trustee for the benefit of noteholders. The question is whether the underlying noteholders can be bound (and are entitled to vote) on a scheme.

19. It has long been established that a beneficiary under a trust of a pecuniary claim against a company is not a creditor of the company and cannot present a winding up petition: Re Dunderland Iron Ore Co. [1909] 1 Ch 446 at 452. The same is also true of the holders of bearer bonds where the covenant to pay is limited to making payment to the trustee for the bondholders: Re Uruguay Central Railway (1879) 11 Ch D 372. The point is that a beneficiary under a trust of a contractual promise for payment to the trustee cannot bring a direct claim for payment to him of the monies due under the contract. He can only sue to enforce the contractual promise for payment to the trustee: Harmer v. Armstrong [1934] 1 Ch 65.

20. A limitation of this kind would be highly inconvenient in many cases and might require the expense and complication of the issue of definitive notes to noteholders. One solution, which has not yet been the subject of a contested decision, is to regard the underlying noteholders as contingent creditors, provided that they have a legal right under the terms of the notes to call for definitive notes to be issued, whereupon they would become the legal owner of the debt represented by the notes. Whether this is right may turn upon the question of whether such a possibility is properly to be regarded as a contingency: see Sutherland v. IRC [1963] AC 235.

21. The flexibility of using a scheme to bind prospective and contingent creditors cannot be extended too far. The of multi-lender loan facilities provides an example.Modern loan agreements usually contain provisions by which specified majorities of the lenders can vote to amend the terms of the facilities. Subject to the usual requirements of good faith and proper purpose in the exercise of majority power in such cases (see e.g. British America Nickel Corp v. O’Brien [1927] AC 369 and Redwood Master Fund v. TD Bank Europe [2006] 1 BCLC 149) such clauses may enable a majority of lenders to require dissentient minorities to alter their existing loans so as, for example, to extend the date for repayment in return for an increased interest rate or more security. They may also enable the terms of the undrawn contractual commitments to be varied on a similar basis.However, such clauses may give individual lenders rights of veto in relation to specific types of amendment and are very unlikely to enable a majority to require dissentient lenders to advance new money without their consent. Can schemes overcome these obstacles to a successful restructuring?

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22. Although the point has never been tested in hostile litigation, it seems generally accepted that (at least where the contract is governed by English law) a scheme can be used to override contractual rights of veto. The reasoning seems to be that by making the contract subject to English law, the parties have implicitly agreed that their agreement shall be capable of amendment by a scheme having statutory force, and that the exercise of the statutory jurisdiction is not ousted by the express contractual provisions as to variation. However, it must be doubtful that a scheme could, even as a matter of jurisdiction, be used to require dissentient lenders to advance new money to the debtor company.A requirement to lend further monies not covered by an existing commitment does not arise out of their existing status as creditors (of whatever description) and cannot be said to concern the lenders in their capacity as creditors.

23. This is not to say, of course that new monies cannot be made available to a debtor company as part of a scheme. Schemes frequently contain undertakings by creditors to make new money available, usually on a super-priority basis. But care must be taken. Such new facilities often carry advantageous interest rates to the lenders, and it may well be alleged that votes are being cast at scheme meetings in relation to the existing debt with an eye to obtaining these collateral benefits rather than advancing the interests of the class as a whole. It is therefore important to ensure that all existing lenders are offered the opportunity to participate in the new facilities, whether or not they vote in favour of the scheme.

Formulating the scheme: the omission of creditors

24. In recent times, the shape of creditor schemes have been critically affected by a combination of two principles: the first is that a company is generally free to decide with whom it proposes any particular compromise or arrangement; and the second is that it is unnecessary to hold meetings of creditors whose rights against the company are unaffected by the proposed scheme.

25. These principles can be used to exclude from the compromise and from any need to give their approval at class meetings, creditors who,at one extreme, are sufficiently commercially powerful that if they were not paid in full, would simply vote against the scheme; and, at the other extreme, creditors whose rights against the company will not be varied in any legal sense, but who have no real economic interest in the company because they are sufficiently “underwater”.

26. The point can be illustrated by two examples. First, an operating company might well decide to pay in full and exclude from a compromise or arrangement a creditor or creditors who would, in a liquidation, rank equally with those who are made the subject of a compromise of their claims. This is a particularly valuable tool where, for example, certain trade creditors are thought to be essential to the continued operation of the company and have the commercial clout to demand payment in full rather than to accept the “haircut” which may be the lot of the finance creditors. A classic example was the engine manufacturers whose continued support was

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essential to the continuation of the business of the Indonesian airline, Garuda, who were excluded from a scheme under which finance creditors were forced to accept a reduction in their debt.

27. Pragmatically, the construction of the scheme in this way requires the exclusion and payment in full of sufficient creditors who would vote against the scheme so as to leave as many others subject to the scheme as are nevertheless likely to vote in favour of their claims being compromised by the requisite statutory majorities. But the selection of those who will be favoured by being left out of the scheme cannot simply be made by on the basis of who is likely to show the most resolve in opposing any compromise. There is probably a requirement that there should be some commercially rational basis for distinguishing between persons who might otherwise be expected to rank equally in an : see Sea Assets v. PT Garuda Indonesia [2001] EWCA Civ 1696, affirming Lloyd J. Self-evidently, it is also essential that there be full disclosure of the differential treatment of the excluded creditors in the explanatory statement provided to scheme creditors.

28. The second example is the modern version of the familiar problem of how to deal with defaulting borrowers in times of depressed markets for enforcement actions. Assume a company with senior lenders, mezzanine lenders and unsecured trade creditors where, in the current market, a forced sale of the business and assets would only realise sufficient value to pay the senior lenders in part, and the mezzanine lenders and trade creditors would go unpaid and shareholders would receive nothing.

29. Senior lenders in such situations are faced with the unenviable prospect of having to pull the plug and crystallise large losses caused by enforcement action and forced sales; or to provide further finance to prop up an ailing business with no assurance that they are not simply throwing good money after bad. In such circumstances, the senior lenders may suggest that if they areto be forced to make further loans, they should be entitled to balance their increased credit risk by obtaining for themselves (to the exclusion of those who are “underwater”) the potential benefit of any future increase in the value of the business. There may not, however, be unanimity among the senior lenders to such a course – especially if it involves the advance of new monies or if certain of the senior lenders are also mezzanine lenders.

30. The result is usually a scheme, the essential elements of which are that part of the senior debt is novated to a new company, and the remainder of the senior debt is released in exchange for the issue of shares in that new company to the senior lenders. Conditional upon that scheme being sanctioned, the business and assets of the company are then sold to the new company. The sale is normally by way of a pre-packaged , with the senior lenders relying upon powers in the security documents to effect releases of the charges over the business and assets. The result is that the senior lenders end up as the owners of the new company which owns the business and assets subject to the reduced liabilities under the novatedloans and any new facilities which the senior lenders agree to provide. The

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mezzanine lenders and shareholders in the scheme company are left behind and receive nothing. Such was the case in Re Bluebrook Limited [2010] 1 BCLC 338.

31. Whilst there are variations on this theme, the critical issue from the perspective of the scheme is whether the mezzanine lenders and shareholders are required to give their consent to the scheme process by a vote at a class meeting. The authorities suggest that this depends upon whether the court is satisfied not only that their legal rights against the scheme company are not affected by the terms of the scheme but also that they have no real economic interest that is affected: see Re Tea Corporation [1904] 1 Ch 12 and Re Bluebrook Limited .

32. The decision in Re Bluebrook highlighted both the importance of valuation evidence and the basis upon which it should be prepared. The evidence was that the company appeared to be balance sheet insolvent, and that if the scheme was not approved, a formal insolvency process was inevitable. Mann J. nonetheless accepted that the relevant basis for the purposes of deciding whether or not meetings of the mezzanine lenders were required was not a valuation on a liquidation or break-up basis, but a valuation on a going-concern basis. As he saw it, the issue was whether a purchaser would pay a sufficient amount for the company’s business that there would be some value for mezzanine lenders. That decision shows that the courts may adopt a cautious approach to protect the expectations of subordinated creditors and shareholders.

CVAs

33. Under section 1(1) of the 1986 Act, a company voluntary arrangement is a “composition in satisfaction of its debts or a scheme of arrangement of its affairs”. Adopting a similar approach to schemes of arrangement under the Companies Act, this must involve some element of “give and take”: see IRC v. Adam [2000] BPIR 986. There are, however, fundamental structural differences in the nature of a CVA and its effect upon creditors.

34. The first is simply that in contrast to a Companies Act scheme, the court is not involved in the process, unless and until a creditor seeks to challenge the CVA under section 6 on the basis of unfair prejudice or material irregularity. The CVA takes its force simply by virtue of the approval of the CVA by the requisite majority in value at the meeting of creditors. A CVA binds everyone who was entitled to vote at the meeting or would have been entitled to vote if he had notice of it.

35. The second is that unlike a Companies Act scheme, a CVA cannot bind a secured or without his consent: section 4.

36. The third is that there are no class meetings of unsecured creditors whose rights are differently affected by the proposal. All unsecured creditors vote as one at the creditors’ meeting: section 3. There is, moreover, no requirement or ability to exclude from voting at a CVA meeting those creditors whose rights may be unaffected by the proposal.

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Unfair prejudice

37. The jurisdiction of the court to set aside a CVA on the grounds of unfair prejudice under section 6 plainly provide some parallels to the questions addressed by the courts when determining class questions and exercising the discretion to sanction or refuse to sanction a Companies Act scheme.

38. The courts haveemphasized that there cannot be a direct read-across between, for example, class questions on a Companies Act scheme and the issue of unfair prejudice under a CVA. So, in SISU Capital Fund v. Tucker [2006] BCC 463 Warren J. commented that the fact that a particular group of creditors would have formed a class which might have blocked a Companies Act scheme does not necessarily mean that they have been unfairly prejudiced when the vote in relation to a CVA goes against them.

39. However, the courts plainly do apply “scheme” techniques when assessing the fairness of CVAs. So, for example, in Prudential Assurance v. PRG Powerhouse [2008] 1 BCLC 289 and Mourant& Co Trustees v. Sixty UK [2010] BCC 882, the courts identified two means of approaching the question of unfair prejudice – the so-called “vertical” comparison and the “horizontal” comparison.

40. A “vertical” comparison is a comparison between the position that a creditor would occupy in a hypothetical liquidation as compared with its position under the CVA. In the SixtyUK case, Henderson J. suggested that this was important as it “generally identifies the irreducible minimum below which the return in the CVA cannot go.” Henderson J. extracted this principle from an obiter dictum of David Richards J. in Re T&N Limited [2005] 2 BCLC 488, to the effect that he ,

“…would find it very difficult to envisage a case where the court would sanction a scheme of arrangement , or not interfere with a CVA which was an alternative to a winding up but which was likely to result in creditors , or some of them, receiving less than they would in a winding up of the company assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale.”

41. Given David Richards J.’s own observations in Telewest as to the limited role that a court plays in deciding whether to give or withhold sanction to a Companies Act scheme, it is suggested that this dictum must be approached with some caution. It does not suggest that the court will impose its own view of the likely returns to creditors in a hypothetical liquidation and uphold any challenge to a CVA by a dissentient creditor which did not promise such returns.

42. This situation probably only really covers two scenarios. In a case in which all creditors are treated equally under the CVA proposal, to interfere on this basis the court would generally have to be convinced that there was either inadequate

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information provided to creditors for them to make a reasonably informed decision; or, if such information was provided, that the creditors were acting irrationally.

43. The second, and more likely scenario, is where there is a difference in treatment of creditors, so that the court can see that one group is trying to obtain an advantage for itself with the result that another group fares less well then it would in a liquidation. But this second scenario shades into the horizontal comparison, which in most cases is likely to be the vital comparison.

44. A horizontal comparison is a comparison between the position of the creditor alleging unfair prejudice and the position of other creditors. The issue is simply whether any different treatment of creditors can be justified, or as it is sometimes put, whether the imbalance in treatment is disproportionate. In reality, this simply means that the greater the disparity in treatment, the more cogent the need for a justification. It is this issue which brings closely into focus the potential for comparison between the rights of creditors under Companies Act schemes and CVAs.

45. In the case of a Companies Act scheme, the requirement for creditors with materially different rights against the company or treatment under the scheme to be given a separate class meeting, and hence a collective right to veto the scheme reflects the concern which judges voiced, from the outset, of the potential for abuse of the jurisdiction. In Sovereign Life v. Dodd [1892] 2 QB 573, Bowen LJ prefaced the famous passage referred to above with the observation,

“What is the proper construction of that statute? It makes the majority of the creditors or of a class of creditors bind the majority; it exercises a most formidable compulsion upon dissentient, or would-be dissentient creditors; and it therefore requires to be construed with case, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to that which it is unreasonable to require them to do, or of making a mere jest of the interests of the minority.”

46. Against this background, the question of whether the court senses that the majority are seeking “make a mere jest” of the minority, by forcing dissentients who would be a separate class under a Companies Act scheme to do something which it is unreasonable for them to be required to do is plainly an important consideration.

47. For example, in the well-known case of Prudential Assurance v. PRG Powerhouse [2008] 1 BCLC 289, it was held that it was jurisdictionally possible for a CVA to require landlords holding guarantees for the payment of rent to treat those guarantees as being released, (so-called “guarantee stripping”). To that extent, schemes and CVAs have a similar jurisdictional approach. However, Etherton J.struck down the CVA on the grounds of unfair prejudice. He pointed out that on a winding up the guaranteed landlords would still have had the benefit of the guarantees, but the CVA essentially sought to deprive them of the benefit of those

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guarantees for no compensating dividend. Etherton J. stated, in terms which echo the concerns of Bowen LJ in Sovereign Lifev. Dodd ,

“Such an illogical and seemingly unfair result could not have been achieved if there had been a formal scheme of arrangement under CA s.425. It is common ground that, under such a scheme, the Guaranteed Landlords would have been in a class of their own, separate from other unsecured creditors. Moreover, the scheme would not have needed to include, and would not have included, creditors who were to be paid in full. Accordingly, as was accepted by [counsel for the company], the Guaranteed Landlords could and would have vetoed any such scheme. The only reason a different result has been achievable with the CVA is that all creditors form a single class for the purposes of a CVA, and that class includes every creditor entitled to a notice of the meeting to approve the CVA, including creditors who would be paid in full. In effect, the votes of those unsecured creditors who stood to lose nothing from the CVA, and everything to gain from it, inevitably swamped those of the Guaranteed Landlords who were significantly disadvantaged by it.”

48. A similar concern is evident in a more recent CVA case – Mourant v. Sixty UK Ltd [2010] BCC 882. Henderson J. struck down a CVA which sought to deprive the landlords of certain stores leased by the insolvent CVA company of the benefit of guarantees given by its solvent parent company for what was eventually exposed to be an entirely arbitrary payment. Henderson J. sounded a strong warning to insolvency practitioners not to promote unfair CVAs which seek to play upon the fact that the minority creditors who are adversely affected would have to shoulder the burden of bringing lengthy and expensive proceedings to set the CVA aside.

49. Some more recent CVAs have raised further concerns in relation to provisions seeking to redraw the future rights and obligations of the parties to leases held by trading companies. These cases raise the question of whether the courts will draw analogies to class questions from Companies Act schemes, or will be more willing to give weight to the public policy of the “rescue culture” over the interests of individual creditors, or groups of them, in maintaining their contractual and property rights against companies in financial difficulty.

50. In Thomas v. Ken Thomas [2006] EWCA Civ 1504, the Court of Appeal held that the prohibition against a CVA affecting the right of a to enforce his security without his consent was not infringed by the resultant limitation upon the landlord’s right to forfeit the lease for non-payment of the rent which had accrued due, but which had been reduced by the CVA. Neuberger LJ appeared to endorse the view that a landlord’s right to forfeit for non-payment of rent was not a security right (see paragraph [43]) and he held that in any event, the landlord was not being deprived of that right; he was merely unable to forfeit for non-payment of rent which he could no longer claim because the underlying debt had been replaced by a

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claim for a different amount. The decision has attracted controversy: if taken to its logical extreme, Neuberger LJ’s approach might suggest that a CVA could legitimately reduce the underlying monetary claim of a secured creditor whilst leaving intact his right to enforce his charge, albeit for a reduced amount. But that would seem to be contrary to the plain intent of section 4(3).

51. In any event, Thomas did notconcern a proposal to reduce future rents payable under a lease. It is clear that, as a matter of jurisdiction, a CVA can modify the rights of a landlord to future rentals: see Re Cancol[1995] BCC 1,148. Moreover, in Cancol , Knox J. indicated that it would not necessarily be unfairly prejudicial for a CVA to distinguish between landlords with future claims. He suggested that it might be legitimate for the company to continue to pay in full the rentals for those premises it wished to use, whilst confining those landlords whose premises it did not wish to use to a claim for a dividend in the CVA. That approach has some similarities in the approach of the court to the formulation of classes in relation to schemes and reflects a pragmatic approach to attempts to rescue the CVA company: see Sea Assets v. Garuda (above).

52. However, there is nothing in Re Cancol to suggest that the courts would be similarly receptive to a suggestion that the landlords whose premises were to continue to be used by the CVA company should also suffer a reduction in future rentals. In Thomas, Neuberger LJ was plainly hostile to any such suggestion, stating, at paragraph [34],

“As at present advised, it appears to me that the rent falling due after the CVA should by no means necessarily be expected to be caught by the terms of the CVA, even if it is capable of being so caught (as was held first instance in Re Cancol Ltd [1996] 1 All ER 37). It strikes me that, at least normally, it would seem wrong in principle that a tenant should be able to trade under a CVA for the benefit of its past creditors, at the present and future expense of its landlord. If the tenant is to continue occupying the landlord's property for the purposes of trading under the CVA (and hopefully trading out of the CVA) he should normally, as it currently appears to me, expect to pay the full rent to which the landlord is contractually entitled -- see by analogy, in the administration context, Re Atlantic Computer Systems PLC [1993] Ch 505 542(g)-543(b) and, in a liquidation context, Re ABC Coupler & Engineering Company Ltd (No.3) [1970] 1 WLR 702. Therefore as at present advised, I consider that a CVA should so provide, or if it does not provide, in the absence of special circumstances the landlord may well be entitled to object to the proposals as unreasonable.”

53. Notwithstanding that very clear indication, more recent CVAs (including those in relation to JJB Sports and Focus DIY) have included terms that altered thebasis upon which future rentals were payable under leases of premises that the company wished to continue to use, whilst stopping any future payments for those premises

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which the company did not want to use and limiting the landlords to claims of a prescribed basis against a compensation fund established for the purpose. No challenges have yet been brought to such CVAs, although they have provoked some debate among practitioners.

54. Issues may also arise in relation to the votes permitted to be cast by creditors with future claims at the CVA meeting. Rule 1.17(2) of the Insolvency Rules 1986 provides for votes to be calculated according to the amount of the creditor’s debt at the date of the meeting and rule 1.17(3) provides that claims for unliquidated or unascertained amounts are to be valued at £1 unless the chairman agrees to put a higher value upon the claim. The decision of the chairman may be challenged under rule 1.17 or under section 6: see Re Newlands (Seaford) Educational Trust [2007] BCC 195.

55. In relation to Companies Act schemes, the court will determine how votes are to be valued when ordering the scheme meetings to be convened. Although cases in relation to insolvent companies have tended to show a willingness to adopt a robust approach to voting, more recent cases, especially concerning solvent insurance companies, have identified concerns that creditors with prospective or contingent claims that present valuation difficulties should not be placed into the same class as creditors with ascertained claims: see e.g. Sovereign Marine and General Insurance [2007] 1 BCLC 228.Logically, such concerns arise not only in relation to the treatment of such creditors under the valuation provisions of the scheme itself, but would also arise if prospective and contingent creditors were allocated a nominal voting amount that might substantially undervalue their claims as part of a larger class.

56. Similar concerns have not yet featured in decided CVA cases, though again, there has been debate among practitioners following the JJB and Focus CVAs, which included a formula which prescribed how the votes of certain creditors might be admitted by the chairman at the meeting.

57. One point which indicates that this may be a ground for future litigation is that, as with Companies Act schemes, claims that votes were wrongly admitted or not admitted at the relevant meetings probably amounts to a jurisdictional question. If the statutory majorities were not properly obtained, the court has no jurisdiction to sanction a Companies Act scheme, and a voting error which affects the result is likely to be regarded as a material irregularity invalidating the approval of the CVA without regard to the underlying fairness issues.

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