The Honourable Mr Justice David Richards:
- These are applications by Cape plc (Cape) and thirteen subsidiaries for an order sanctioning a scheme of arrangement under section 425 of the Companies Act 1985 between each company and its creditors with present or future asbestos-related claims. They are not opposed. On 9 June 2006 I sanctioned the scheme as regards all the companies with one exception and I give my reasons in this judgment.
- In a judgment ([2006] EWHC 1316 (Ch)) given on the application to convene the meetings of creditors, I described the background to the proposed schemes, the nature of the claims involved, and the provisions of the scheme and the agreements and other documents (the ancillary documents) to be executed or adopted in accordance with its terms: paras 1-9, 19-22, 28-30.
- I will not repeat the detail set out in my earlier judgment. It is, however, worth reiterating that Cape and its subsidiaries (the Cape group), unlike some other former manufacturers and distributors of asbestos products, are solvent. The purpose of the scheme is to protect the present and future businesses of the scheme companies, to the mutual benefit, as the companies submit, of the companies and their asbestos-related claimants. This is to be achieved by, on the one hand, providing for the payment of claims by a newly-formed subsidiary of Cape (CCS) and prohibiting their enforcement against the scheme companies and, on the other hand, by providing for the funding of CCS by Cape out of available resources. Initial funding of £40 million will be provided to CCS, which has been raised by Cape through a share issue and borrowing. It is anticipated that this will be sufficient to cover claims over the next eight years. Thereafter, further funding will be provided in accordance with and subject to the terms of the ancillary documents, as described in paragraph 20 of my earlier judgment. Asbestos-related claims for death and personal injuries are likely to continue to emerge over the next 40 to 50 years.
- The reasons for the scheme and its purpose are described by the chairman of Cape in a letter sent to the creditors:
"Claims against the Scheme Companies will continue for the foreseeable future. It remains very difficult to predict with any certainty what the levels of these claims will be, when they will arise and the financial consequences of these claims on the continued solvency of the Scheme Companies. It is therefore important that the Group remains in a position to generate the resources needed to meet these claims as and when they fall due. A number of the other companies faced with the same issues have been forced into insolvency, often leaving claimants, where there is no insurance cover, with little prospect, if any, of receiving compensation.
As can be seen from the summary of the profit and loss accounts and balance sheets of the Group for the years ended 31 December 2002, 2003 and 2004 and for the six months ended 30 June 2005, set out on pages 78 and 79 of this document, the Group is at present generating sufficient funds to discharge its liabilities as and when they fall due. The Cape Directors expect this situation to continue. Nevertheless, the uncertainty over asbestos-related claims in the future is having a prejudicial effect on the growth and development of the Group's businesses.
As a result of the uncertainty it is likely that the Group has lost a number of business opportunities, and absent the Scheme may continue to do so, as for example the Group has, at times, been unable to obtain funding at commercially acceptable rates. There are also certain significant organisations in the Group's fields of activity which have limited or placed conditions on their dealings with the Group, for example, by demanding guarantees or bonds in circumstances in which they would not do so of the Group's competitors. The Cape Directors believe that such restraints on the Group's ability to expand should be alleviated to a significant extent if the Scheme were in place.
The purpose of the Scheme is to provide long term financing of the claims of Scheme Creditors in a manner which on the one hand provides the Group with significant protection from the risk of insolvency and on the other hand, by reason of the enhanced opportunities which this protection provides, makes it more likely that over time the Group will be able to discharge its liabilities to Scheme Creditors in full.
The intention is that the Scheme will provide the Group with a stronger and more secure financial base. The Directors believe that from this base the Group should be better able to generate the resources needed to secure the continued payment of compensation to Scheme Creditors. The Directors also believe that the Scheme, if implemented, should remove a significant obstacle to the Group's growth and should assist the Group in increasing its business activities."
- Each of the companies proposing the scheme applied for an order summoning meetings of two classes of creditors, described as recourse scheme creditors and general scheme creditors. The former are those creditors whose claims are or may be covered by insurance. In the event of the insolvency of a scheme company, they would have rights directly against the company's insurers under the Third Parties (Rights Against Insurers) Act 1930, which are modified by the terms of the scheme. Because of these modifications to their rights, the recourse scheme creditors constitute a separate class. As it is impossible to know whether and to what extent their claims will be covered by insurance, they also form part of the class of general scheme creditors. There was argument on some issues as to the composition of classes at the convening hearing: see paragraphs 23-52 of my earlier judgment.
- Meetings of the two classes of creditors of each company originally proposing the scheme were convened in accordance with the court's orders. In relation to nine subsidiaries of Cape no creditor attended or voted at either meeting and, in relation to two others, only one meeting was attended by any creditor. Accordingly, the scheme cannot be sanctioned as regards those companies. They are not among the companies whose inclusion is essential to the objects of the scheme and, in accordance with express provision in the scheme, it has been modified to exclude them. In the case of one company, Altitude Scaffolding Limited, each meeting was attended by only one creditor. This raised a legal issue as to whether one person can constitute a "meeting" for the purposes of section 425, which I have dealt with separately: see [2006] EWHC 1401 (Ch).
- Attendance at the meetings of the other companies varied considerably. This is not surprising in a group of companies, where the businesses of some companies have been very much more extensive than others. Section 425(2) requires a scheme to be approved by a simple majority in number representing three-fourths in value of the creditors attending a meeting. In the present case, the majorities in number were never less than 93.75% and the majorities in value were never less than 93.12%. Taking all the votes cast at all the meetings the majorities in number and value were over 97%.
- The function of the court in considering whether to exercise its discretion to sanction a scheme is summarised in the often-cited passage from Buckley on the Companies Act (14th ed pp 473-474), which is derived from the judgments of the Court of Appeal in In re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 and In re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385:
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second 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."
- In approaching the question as to whether to sanction the scheme in this case it must be borne in mind that it is a highly unusual scheme with far-reaching consequences for the people affected by it. It affects the rights of creditors of companies which are presently solvent and able to meet claims as and when they fall due. If sanctioned, it will bind not only those presently making claims but those who may in the future make claims arising out of past exposure to asbestos dust. Such claims may be made over a period which may extend for up to 40 to 50 years. The proposals are necessarily very complex, even to those well used to scrutinising complex arrangements. Many of the actual or potential claimants directly affected by the scheme have no experience or expertise in dealing with such proposals. These considerations emphasise the importance of the exercise by the court of its discretion as to whether to sanction the scheme, notwithstanding the large majorities in favour of the scheme at the meetings. There are as it seems to me a number of inter-related factors relevant to this issue.
- First, the Cape group and its asbestos-related claimants are faced with a highly unusual problem, to which the scheme seeks to provide an unprecedented solution. Claims will continue to be made over a very long period and, because there is insufficient insurance cover, claimants will be dependent on the future success of the Cape group to meet their claims. As the extract from the chairman's letter which I have already quoted shows, the group's exposure to asbestos claims and the consequential risk of insolvency is hindering the successful development of the group's business. In my judgment, the solution provided by the scheme is in principle such as intelligent and honest members of the classes of creditors of all the relevant companies might reasonably approve.
- Secondly, the detail of the arrangements established by the scheme is critical to an assessment of whether the scheme should be sanctioned. In particular, they must strike a sensible balance between the needs of the companies and of the claimants.
- I summarised the provisions of the scheme and ancillary documents in paragraph 20 of my earlier judgment. With one additional restriction on the payment of dividends, to which I refer below, the terms remain as there summarised. The detailed provisions were the subject of consultation by Cape with a number of solicitors' firms which have significant practices in acting for claimants in asbestos cases. One of those firms, Thompsons, acted as coordinator for four other major claimant firms, as well as representing the Forum of English Asbestos Victim Support Groups (the Forum), Clydeside Action on Asbestos and Clydebank Asbestos Group. KPMG were engaged to report to Thompsons on the financial aspects of the scheme and counsel were instructed by them to advise on the legal aspects. Cape agreed to meet the reasonable fees of KPMG and counsel. Thompsons instructed leading and junior counsel for the convening hearing. At Cape's request, Russell Jones & Walker, another firm with a major claimants' practice, instructed leading and junior counsel on behalf of an employee who has been exposed to asbestos but has not developed (and, it is to be hoped, never will develop) any disease as a result.
- Although the detailed terms of the arrangement were not a subject for argument at the convening hearing, there were detailed discussions and exchanges between counsel instructed by Thompsons, Russell Jones & Walker and Cape, and between solicitors. A substantial number of points were raised with Cape, many of which resulted in changes to the terms of the arrangement.
- The report prepared by KPMG raised a number of issues, of which the most significant related to the cap on Cape's funding obligations to CCS and to the payment of dividends. As to funding, their overall conclusion was:
"From the perspective of General Creditors, there is a considerable benefit to be gained from having a £40 million fund of money set aside, with any undistributed remainder available in the event of an insolvency of Cape. There is also considerable benefit in providing Cape with a buffer mechanism so that it is able to defer the payment of asbestos related claims if the continued payment of these claims would result in the insolvency of Cape. However, as currently drafted the Scheme restricts the Top-Up Payments to the lower of (i) the Top-Up Instalment and (ii) 70% of Consolidated Adjusted Operating Cashflow. The effect of the latter restriction is that Cape may be in a position to make higher payments to CCS, but is not obliged to do so. Overall we consider the cashflow based formulation for top up payments to be too flexible, making its fair operation reliant on the integrity and goodwill of the directors."
In this context, they raised in particular three issues. First, Cape's funding obligation is capped at 70% of the group's consolidated adjusted operational cashflow, which is the subject of a complex definition, and KPMG raise a concern that its operation could be manipulated to reduce available cash in a particular period. Secondly, after the initial payment of £40 million to CCS, the liabilities of the businesses of Cape group companies would be paid ahead of payments to CCS. Thirdly, in certain circumstances the cap could apply when Cape was able to make higher payments, for example through the use of bank facilities, and they make a number of suggestions as to how the terms of the arrangements could be amended to address this concern.
- As to the risk of manipulation, KPMG themselves supply a substantial answer:
"Whilst it may be easy to manipulate the operating cashflow for a single year, it would become more difficult over a longer period of time. If the business is consistently generating cash over a number of years then, absent flagrant abuse in manipulating working capital levels, this would eventually work its way through to the Consolidated Adjusted Operating Cashflow calculation."
As to the second issue raised by KPMG, the priority of funding for the liabilities of the continuing businesses is an essential feature of the proposals. The purpose of the proposals is to preserve those businesses so as to enhance the continuing ability of the companies to fund the payment of claims. As to the third, Cape's response is given in a witness statement by its secretary Benjamin Whitworth:
"In constructing the Scheme, PLC and its advisers gave considerable thought to the best way in which to ensure that an appropriate balance was struck between the protection of creditors' interests and the ongoing needs of the business. Ultimately, PLC's ability to fund CCS depends on the availability of cash. Early in the development of the Scheme it was realised that a test based on cash (as opposed to say profit or net assets) would have to be devised and a number of alternatives were examined. These included various "cash sweep" mechanisms similar to that suggested in the KPMG Report. It proved difficult to devise a workable test on this basis because it was difficult to fix, or to provide sufficiently robust parameters within which to fix, the definition of a permissible level of cash (the demand for which follows the Group's working capital cycle). This difficulty is exacerbated by the fact that predicting the peak cash requirements of the business over the next 40 years is impossible.
KPMG suggest that the test be fixed by reference to available bank facilities. The bank facilities available to a company at any particular time may fluctuate depending on a number of factors including the bank's perception of the financial covenant of the company – which is a subjective test. It was not thought practicable to devise a cash-based test on this basis which would have the flexibility to last beyond the foreseeable future whereas the Scheme is intended to be capable of operating for over 40 years."
- Over and above these responses, the arrangements contain strong incentives for Cape, if it can, to maintain funding at a level sufficient to pay all claims in full. If CCS is under-funded, Cape will be prohibited from paying dividends. Mr Whitworth states that the directors believe this is likely to be a compelling reason for ensuring that, if possible, CCS is fully funded. A further incentive is that, if the payment percentage applicable to claims remains below 100% for twelve months or more, recourse scheme creditors would become entitled to enforce their claims against the scheme company concerned and, as a last resort, force it into insolvency.
- As to the payment of dividends, KPMG considered that there should be included an additional pre-condition taking account of future prospects. Cape accepted this view and have included a condition that the directors of Cape must certify that they anticipate the scheme funding percentage for the current and following financial years to be not less than 110%.
- I am satisfied that the detailed terms of the arrangements strike a balance between the various interests involved which could reasonably be approved by the general and recourse scheme creditors of the companies.
- The third relevant factor to the decision whether to sanction the scheme is the level of support among the creditors affected. The scheme was approved by very high majorities at all the meetings, but it is relevant also to ask, as the extract from Buckley states, whether the class was fairly represented by those who attended the meeting. This reflects a passage in the judgment of Bowen LJ in In re Alabama, New Orleans, Texas and Pacific Junction Rly Co [1891] 1 Ch 213 at 245:
"It is in my judgment desirable to call attention to this section, and to the extreme care which ought to be brought to bear upon the holding of meetings under it. It enables a compromise to be forced upon the outside creditors by a majority of the body, or upon a class of the outside creditors by a majority of that class. It would be most unjust to bind creditors or classes of creditors by the decision of three-fourths in value of those who attend a particular meeting, unless you have secured that the meeting shall adequately represent the entire body. But the section makes no provision for that, except by enacting that the meeting is to be held in the manner in which the Court shall direct."
In that case Bowen LJ had some concerns as to whether adequate notice had been given of the meeting. No such concerns arise in the present case.
- The court is however concerned to take into account the turn-out at the meeting and whether creditors have for any reason been deterred from attending or voting at the meeting: as to turn-out, see In re Osiris Insurance Ltd [1991] 1 BCLC 182 and In re British Aviation Insurance Co Ltd [2006] BCC 14.
- Thompsons, who did not formally appear on the sanction hearing, raised three concerns which were passed on to me by counsel for Cape. First, the turn-out at the meetings was low. Secondly, the scheme documents and voting forms were very complex, which led to creditors being unable to understand the scheme. This in turn led to creditors not filling in voting forms, or not doing so correctly, which contributed to the low turn-out. Thirdly, there were difficulties with the helpline not returning calls, which may also have affected understanding of the arrangements and turn-out at the meetings. Thompsons have made clear that, on behalf of the claimants for whom they act, they adopt a neutral stance on the scheme. These points are made neither in support of nor in opposition to it, but only to bring relevant matters to the attention of the court. I am grateful to them for doing so.
- Turn-out at the meetings varied considerably. Taking the meetings of all the companies, a total of 626 general scheme creditors with claims valued at almost £31 million voted and a total of 570 recourse scheme creditors with claims valued at almost £28.3 million voted. All or most of the recourse scheme creditors also voted as general creditors. The turn-out of general scheme creditors for each of the four key companies ranged from 63 to 162 in number and £2 million to £11.2 million in value. The numbers and values for some of the other companies were much smaller.
- Turn-out figures are, of course, meaningless without knowing the total number who could attend and the total value of their claims. This presents formidable problems in the present case, which includes not only claims already made but also those which may be made in the future. I am satisfied on the evidence that it is impossible to arrive at meaningful estimates on a company by company basis. However, on a group basis, some estimates can sensibly be made of the value of future claims. The consultant actuaries' best estimate of the discounted value of all the original scheme companies' unpaid claims is almost £120 million, within a range of low and high estimates of £70 million and £240 million. The total turn-out in value at the meetings was almost £31 million, representing about 25% of the total best estimate.
- In In re Osiris Insurance Ltd, the turn-out in number was low (35 out of 971) but creditors with claims worth about 41% of the total value attended the meeting. Commenting on this, Neuberger J said at p 189:
"It is true that the numbers of those who voted was pretty small compared to the number of those entitled to vote, but that is by no means unusual in the context of votes at meetings called pursuant to s 425. In any event, that does not call into question the fact that not a single scheme creditor thought it right to vote against the scheme. Furthermore, if one looks at the value of the scheme claims held by those who voted, they did represent a substantial proportion of those entitled to vote."
In In re British Aviation Insurance Co Ltd, the turn-out in number was about 15% representing just over half in value of the total claims, judged in each case by reference to "actual or pending" claims. Counsel for the company in that case pointed out that the relatively low number was not unusual by the standards of schemes of arrangement, a view which I would endorse, and Lewison J said that the turn-out was not in itself a valid reason for refusing to endorse the majority view.
- I agree with Sir Thomas Stockdale's submission that, having regard to the circumstances of this group, the nature of the claims to be dealt with and the fact that in effect group assets are to be made available to meet claims, it is appropriate to look principally at the aggregate attendance figures. Further, in the case of the smaller companies which themselves had apparently low turn-outs, their assets are very small, so that the arrangements are likely to be overwhelmingly advantageous to their claimants. I am satisfied that overall the turn-out figures adequately represented the relevant classes and should not deter the court from sanctioning the scheme.
- It is significant to note that almost all the creditors who voted were future, rather than present, claimants. A much lower turn-out is to be expected from future claimants. The evidence which formed the basis of Mr Phillips' submissions at the convening hearing, that the future claimants should comprise separate classes, was to the effect that there was virtually no risk that present claimants would not be paid in full, but the risks increased with future claims. Nonetheless, the future claimants who voted have overwhelmingly approved the scheme. Present claimants, all or most of whom are legally represented, have for the most part not voted, indicating at least no great objection to the scheme.
- The second point raised by Thompsons was that the scheme document and voting forms were complex, deterring or preventing some creditors from voting. The arrangements are complex, and there is no getting away from it. Creditors' understanding of the proposals was enhanced by a very helpful single page summary prepared by the Forum and circulated by Cape with the scheme document. The voting forms were, I believe, as straightforward as the circumstances allowed. Recognising that the forms were nonetheless longer and more complex than usual, the order convening the meetings specifically gave the chairman a wide discretion to admit forms which were incomplete or incorrect, provided certain basic criteria were met. The evidence filed by Cape shows the very considerable efforts made, so far as possible, to assist creditors to lodge correctly completed forms and to admit incorrect or incomplete forms. There is no evidence as to creditors who wished to vote but were unable to do so as a result of the complexity of the proposals or the forms.
- So far as the helpline is concerned, Thompsons made a number of testing calls which were not returned. Cape had very little time in which to gather the information necessary to respond on this point, but I was informed that a total of 731 calls from all sources were made, of which 367 required a later response. Of those, later replies were given to at least 338. There is nothing in this which gives rise to significant cause for concern.
- The fourth factor is that there is no opposition to the scheme being sanctioned. In circumstances where the major firms of solicitors acting for claimants and asbestos victims' support groups have been kept informed of the development of the proposals and have been consulted in their development, the absence of opposition has some significance. Having said that, it does not lessen the duty of the court to be satisfied that this is in all the circumstances a proper scheme to sanction.
- There is one further feature of the arrangements which requires separate consideration. The scheme itself contains limited provisions for future amendment without the court's involvement, while the agreements to be executed pursuant to the scheme, which contain many of the terms of the arrangements, contain extensive provisions for future amendment. An issue raised at the convening hearing was whether the court had jurisdiction, or would ever exercise jurisdiction, to sanction a scheme where the scheme or its integral ancillary documents contained provisions for later amendment. I held that the court does have jurisdiction, and in an appropriate case would exercise it: see paras 53-73.
- I would regard it as exceptional to sanction a scheme which included powers of amendment, either of the scheme or of ancillary documents containing important provisions integral to the arrangements for which the scheme provides. In sanctioning a scheme, the court has to be satisfied that it is fair and reasonable, and for that purpose will examine the commercial and other terms of the arrangement. It will not of course be able to examine later amendments to the terms. In considering whether to sanction a scheme containing amendment provisions, the court is concerned to be satisfied as to the need for the amendment provisions and as to the safeguards for the interests of creditors or members which may be affected by amendments.
- As to the need for the amendment provisions, this is an exceptional scheme, in that it seeks to put in place arrangements for meeting asbestos-related claims over a period which is likely to continue for 40 or 50 years. It is a practical certainty that over that period, there will be legal, medical and financial changes which make amendment essential or highly desirable. By way of illustration, two decisions of the higher courts this year will have a major impact on the arrangements: Rothwell v Chemical & Insulating Co Ltd [2006] EWCA Civ 27 (now on appeal to the House of Lords) and the decision of the House of Lords in Barker v Corus (UK) Ltd [2006] 2 WLR 1027. It would be impracticable for a new scheme of arrangement to be proposed each time an amendment was required. In this case, arrangements which did not allow amendments in such circumstances could themselves be regarded as unfair.
- As to the protection of the interests of creditors, I described in paras 56 and 57 of my earlier judgment the issue of special shares in Cape and CCS to The Law Debenture Trust Corporation plc as trustee, the restrictions on the payment of dividends and other matters, and the right of the trustee to appoint one or two directors to the board of CCS with exclusive voting rights on important issues. The trustee's consent is required to any exercise of the power of amendment and the giving of consent is subject to the restriction set out in para 57 of my earlier judgment. In my view, these provisions provide a proper level of protection of the interests of creditors.
- In my judgment, in the light of these considerations, the inclusion of the amendment provisions is fully justified.
- Overall I am satisfied that the scheme should be sanctioned as regards all the applicant companies, with the exception of Altitude Scaffolding Limited.
