Neutral Citation Number: [2013] EWHC 4072 (Ch)
Case No: 7830 OF 2013
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 18 November 2013 

Before :

THE HONOURABLE MR JUSTICE HILDYARD
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	IN THE MATTER OF THE CO-OPERATIVE BANK PLC
		
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	IN THE MATTER OF THE COMPANIES ACT 2006		

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Antony Zacaroli QC and Richard Fisher (instructed by Allen & Overy LLP) for the Bank
Mark Phillips QC and Adam Al-Attar (instructed by Shearman & Sterling LLP) for the LT2 Group
Peter Arden QC (instructed by Stephenson Harwood LLP) for The Law Debenture Trust Corporation Plc

Hearing date: 18 November 2013
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Judgment

The Hon. Mr Justice Hildyard : 
1.	The application presently before me is made by the Co-operative Bank Plc, which I will call the “Bank”, for an order convening a single meeting of creditors, whom I shall refer to as the “Scheme Creditors”, for the purpose of considering and, if thought fit, approving a scheme of arrangement (“the Scheme”) pursuant to section 896 of the Companies Act 2006.
2.	The Bank is incorporated and domiciled in England. It carries on a banking and financial services business. It is regulated by the UK Prudential Regulation Authority (the “PRA”) and the UK Financial Conduct Authority (the “FCA”) and it is authorised to conduct business as a bank. It is a subsidiary of Co-operative Banking Group Limited, an industrial and provident society that is itself a subsidiary of Co-operative Group Limited, which I shall call “Group”.  Group is the UK's largest mutual business, being owned by over 7 million consumer members.
3.	The Bank is currently facing significant financial pressures. This is in consequence of business losses and a changing regulatory regime and requirements. The long and the short of it is that it has sustained losses; its capital base has been eroded; and furthermore, it cannot presently meet the new regulatory requirements, further to BASEL III. 
4.	As to that, the interim Financial Policy Committee of the Bank of England has, in March 2013, voted unanimously that the PRA should take steps to ensure that by the end of 2013 major UK banks and building societies, including the Bank, should hold capital resources equivalent to at least 7% of their risk-weighted assets, assessed using the BASEL III definition of equity capital. There are certain deductions and adjustments allowed.
5.	The Bank is unable to meet this requirement without a comprehensive recapitalisation. As at June 2013 the Bank's unaudited consolidated balance sheet, now updated I think, showed an amount of common equity tier 1 capital in the region of only 3% in comparison to the required 7%. 
6.	In these circumstances, much work has been done to fashion a means of recapitalising the Bank to ensure that it can continue in business. What is termed the Liability Management Exercise has been devised to address and satisfy the need for further capital, the requirement being in effect to raise £1 billion by the end of this year and a further £500 million in 2014.
7.	The Liability Management Exercise is designed to enable some £1.2 billion to be raised. The remainder (£300 million) is to be provided by Group. The Scheme is part of the Liability Management Exercise, but it relates only to debt instruments which are compositely referred to as “Dated Notes”. The indebtedness which the Dated Notes comprise is some £937 million. There are other forms of what I might broadly call indebtedness in the shape of bonds and preference shares.  Under the Liability Management Exercise those will be dealt with by a process of exchange for different securities, but they are not part of the Scheme. The Scheme is in effect conditioned on the achievement of the objectives of the entire Liability Management Exercise, but it is only the Scheme which presently I have to consider.
8.	I should also make the point that at this stage, this being an application for the convening of a class meeting, I am not concerned with the overall fairness of the Scheme which is proposed. That will be a matter for the sanction hearing, assuming that the resolutions to be put are passed. All I am concerned with for present purposes, pursuant to the new regime introduced pursuant to Re Hawk Insurance Co Ltd [2001] 2 BCLC 480, is to determine whether at this essentially preliminary stage what is proposed, that is to say, a single class meeting for all forms of the Dated Notes, is appropriate.  Even that is, as I say, only conditional in the sense that the court still has jurisdiction at the sanction hearing to revisit the question of classes, but in the new days following Re Hawk, that would be most unusual and the real question is addressed for practical purposes at this stage. It is only fair that it be addressed after proper circulation to those affected of the details of what is proposed; and I am satisfied on the basis of the evidence provided that that has been done in the Practice Statement Letter (“PSL”).
9.	The Dated Notes to which alone the Scheme relates are comprised of seven different forms of notes, six of which are denominated in sterling, one of which is denominated in euros. They have different interest or coupon rates and, as the collective description of them may imply, they have different maturity dates.  
10.	These factors might incline one at first blush to suppose that there should be class meetings for each, given their different rights. The factor which I have already mentioned, which is relied on as justifying a single class meeting, is the very fact that absent the Scheme and the satisfaction of the Liability Management Exercise as a whole, the holders of the Dated Notes do not appear to have any practical prospect of receiving anything by way of return on the alternative scenario of an insolvency. 
11.	More particularly, the threat faced by the Bank in light of its reduced capital position is that absent a successful scheme of arrangement for its recapitalisation, it will come under a special resolution regime in accordance with the Banking Act 2009 where, in the wake of the Lehman crisis and the difficulties in the financial markets which then followed, there is provision for what in effect is intervention to stabilise the position of a UK banking institution.
12.	The alternatives to stabilisation, which will in practice depend on injecting public funds, are an insolvency procedure or an administration procedure. The brute truth is that the UK Government and regulatory authorities have made clear that their predisposition, at any rate, will not be to expose further public money to save a failed bank, even if that means allowing failing banking institutions to fail and go into insolvency or other similar process. Whether the government and the regulatory authorities ultimately would allow failure of this particular Bank cannot be certain: but it is at least a real risk.
13.	Whilst of course the question of what procedure might be adopted if the Banking Act alternative regimes became the only reality is not in the hands of the Bank or the Group, but would be in the hands of the regulators, nevertheless I am persuaded on the basis of the evidence provided to me that the concern of creditors, and in particular the holders of Dated Notes, and that which would inform their consideration of what is now offered, is the very real risk of insolvency unless the Scheme proceeds.  Put another way, the debate which is likely to occur would be a debate comparing what their return, if any, would be on an insolvency if they do not accept the proposals. 
14.	In these circumstances, it is therefore contended that the proper comparator, and the economic reality that will inform the approach of the Dated Note holders, is the risk they share of no returns in the event of an insolvency procedure, and that the question of class meetings should be addressed in that context.
15.	Given that, as I have indicated, all the holders of Dated Notes would face the reality that they would receive nothing and would, insofar as they have claims at all, rank pari passu amongst themselves, and that others in the waterfall, including unsecured creditors, would be ahead of them, I am persuaded that it is proper to take as the comparator the possibility or real likelihood of insolvency. 
16.	The test is a hallowed one which has been long established, but of late quite often repeated by way of emphasis. The question as to whether separate class meetings are required for groups of creditors depends on identifying what least number of classes is necessary to ensure that the rights of all persons within a class are not so dissimilar that they cannot consult together with a view to their common interest. The latter part of the test was established as long ago as 1892, in the case of  Sovereign Life Assurance Co v Dodd [1892] 2 QB 573; and the more recent focus on avoiding excessive fragmentation of classes lest a minority interest group be given a power of veto (or at least a disproportionate voice) is plain from cases such as Re Hawk, and it has been repeated and further elaborated, for example, in the case of Re UDL Holdings Limited [2002] 1 HKC 172 in the Supreme Court of Hong Kong in a judgment given by Lord Millett.
17.	The question, therefore, that I have to address, given the common risks that have been identified and their likely influence, and what I have called the comparator which I have identified, is whether the different rights of the holders of Dated Notes as they exist against the company presently, or the rights which they would receive if this Scheme is implemented, differ in such a way as to make it unrealistic to suppose that all the holders of the Dated Notes can properly consult together in one class with a view to their common interest. 
18.	To some extent the comparator answers the question. Those who have no realistic prospect of obtaining any return and who rank pari passu between themselves in an insolvency process obviously have a common interest sufficient to enable a constructive discussion on the alternative. It seems to me that by reference to (as it was put by Mr Zacaroli QC, counsel for the Bank) the rights going into the Scheme, the seven different varieties of dated subordinated debt securities can, for the purposes of considering the Scheme in the circumstances that have arisen,  be treated as one. 
19.	Then the question is, as again Mr Zacaroli put it, to look to see what rights they would have coming out of the Scheme. In that regard, subject to one or two points which I need to address (I think four in all were identified, to put it more accurately), the rights of the cohort of holders of Dated Notes are the same for all.
20.	In particular and as has been explained by Mr Niall Booker, the Chief Executive Officer of the Bank, in his very helpful witness statement supporting the Scheme, in each case all the holders will be entitled, in exchange for their Dated Notes, to, first, a share of £100 million of 11% Bank T2 notes, secondly a share of 45% in the equity of the Bank, and thirdly an opportunity to subscribe for a further 25% equity in the Bank for £125 million in cash through an open offer. 
21.	I clarified with Mr Zacaroli, as regards the second element, that the 45% equity would be effective by way of subscription by the holders of the Dated Notes for new shares in the Bank. Putting very broadly the mechanics, it would be that the existing shares held by Group in the Bank would be converted into deferred shares and thus made essentially valueless, and new shares would then be issued in the proportions which are implicit in what I have described. Ultimately, if all the equity is subscribed, including the additional amount to be offered of £125 million, the holders of Dated Notes will own 70% of the Bank.
22.	Turning, then, to the particular questions which arise in determining whether a single class is appropriate, Mr Zacaroli has been extremely clear in identifying possible arguments in favour of more than one class.
23.	The first consideration which he addressed to me related to the arrangements for underwriting of the new equity offer for £125 million worth of shares. He explained to me, and took me to the evidence in support of the conclusion, that underwriting was in the context entirely necessary in order to ensure that the whole arrangement could be certain to succeed. He referred me to the fact that a sub-group of the holders of Dated Notes called the LT2 Group, who comprised some 48% of the combined constituency and who have negotiated the elements of the deal which I have described, have agreed and are already on risk to underwrite the offer in return for a 4% underwriting fee. Others will have the opportunity to enter into sub-underwriting arrangements whereby, for the lesser risk, in that they will not be on risk until at the latest the date of the class meeting (I think it is on 11 December), they will receive a 2% fee.
24.	The question that arises is whether the sub-group of Dated Note holders, the LT2 Group, has by virtue of the 4% underwriting arrangement, as contrasted with the sub-underwriting arrangement of 2%, an inducement to support the Scheme which makes it difficult or impossible for them to bring the same perspective to bear on the Scheme as the others.
25.	I think I should say two things in this regard by way of the factual background.  The first is that I am given to understand that 4% and 2% are both within reasonable ranges which would be payable in respect of underwriting fees. The second is that the 4% of course will be reduced according to the amount of sub-underwriting which is taken up. Furthermore, the amounts involved are relatively – and I stress that, relatively – minor, in that my understanding is that the 4% fee will yield some £5 million to be shared by all those entitled to that percentage, and it follows that some £2.5 million may be made available for the sub-underwriters. In my view and judgment, that is not a factor which logically or practically can be supposed to alter the perspective of the cohort of holders of Dated Notes in their approach to and discussions of the proposed Scheme. 
26.	At one moment I was concerned that the only evidence in support of the various percentages is a short reference to the percentages being appropriate in Mr Booker's witness statement to which I have already referred and, given my ignorance of the market, I wondered whether I should require further comfort in that regard. However, on the basis that I have described, and on the further assurance from all counsel that those amounts are within the margins that they have seen in the past and others would expect, I do not propose to require any further witness statement in that respect.
27.	The second matter in which the position after the Scheme or under the Scheme would differ in the case of the LT2 Group as compared with the other Scheme Creditors is that the LT2 Group are given rights to nominate two new directors, such right to be exercised, as I understand it, seven days before the 11 December class meeting date. The right is only one of nomination and their nominees will of course have to be put to a vote of the relevant constituency, which will take place outside the Scheme meeting, though it will be, as I understand it, on the same day. It will be what I might describe as a “once only” right. They will not in the future have any special right of nomination, still less any special right of selection.
28.	The position as regards such a special power, if I can put it that way, was discussed by Mr Justice David Richards in the case of Re Telewest Communications Plc [2004] EWHC 924 (Ch). He considered a more extensive right which was not subject to a vote but allowed a one-off selection of directors on behalf of the constituency concerned. Of course each case must be taken in its own context, but it is of comfort to me that Mr Justice David Richards in that case did not consider the conferment of that right to be such as to require any separate class meeting, and in this case, given the attenuated right, I am satisfied that it is not a right such as to cause any difficulty in class terms.
29.	The third matter which was expressly drawn to my attention was that, since the LT2 Group had been charged in effect with the negotiation of the deal which the Scheme comprises, they had been afforded access to information which was not at that time shared with or known to other members of the constituency. 
30.	However, in that regard Mr Zacaroli assured me that ultimately there has been equality of access to relevant information in the sense that the explanatory statement, which is a necessary requirement, contains all relevant information bearing on the Scheme which was available to the LT2 Group, and thus all the constituency have in the end been brought into the same circle of information. Mr Zacaroli very properly drew to my attention the fact that there was some discrepancy, in that whilst LT2 members would have had the chance to consider the information for some time, the others would have that opportunity for a lesser time. Nevertheless it seems to me, taking into account the fact that they are for the most part sophisticated investors rather than retail investors, who have no doubt been alerted and are fully aware of the difficulties which the Scheme is meant in part to address, I am persuaded that this disparity in initial information is not such as to require any different class meeting structure.
31.	The fourth matter which Mr Zacaroli drew to my attention arose out of the fact that, as I have already indicated, although six of the seven sorts of Dated Notes are denominated in sterling, one is denominated in euros and therefore there has to be provision, as there is by reference to a specific date, for conversion of the liability into sterling. 
32.	As far as that is concerned, and again by reference to Re Telewest where an average was taken rather than a date-specific conversion as in this case, I am persuaded that there are no circumstances presently apparent which mean that any one constituency, be it euro or sterling, can feel particularly disadvantaged. It is uncertain how the market will move. There is the further factor, though of course the past is no necessary guide to the future, that there has been no remarkable volatility in the exchange rates concerned.
33.	Mr Zacaroli also drew to my attention a witness statement from Mr Adam Marc Kupitz as to the position which would apply under the United States Securities Act 1933 as amended. I can summarise that by saying that, having regard to the provisions of the Scheme, he was content that the exemption provided for in s.310 of the Securities Act would be available. Accordingly it seems to me that when one looks at the rights coming out of the Scheme, they are substantively the same for all Scheme Creditors and none of the special provisions relating to the LT2 Group is such as to require a further class meeting.
34.	Accordingly, as it seems to me at this stage, the recommendation to me that there should be a single class in respect of all seven groups of holders of Dated Notes is justified. 
35.	All I need add further is that it is of substantial comfort also that, notwithstanding dispatch and receipt of the PSL, there are no objections put forward, as far as I am aware, either in writing or by anyone appearing in court.
36.	It remains for me to determine matters of procedure in respect of the single class meeting. In that regard there is one what one might call a wrinkle. This is that instead of the trustees under the trust deeds on which the notes are held voting, it is proposed that those beneficially interested in the relevant debt instruments should vote in the place of trustees, who will therefore not vote.
37.	This caused me some initial anxiety, since of course the statutory enabling of a scheme depends upon the votes of creditors by the prescribed margin. I was concerned lest, for all the economic sense of the matter, nevertheless persons beneficially interested under a trust might not be considered to be creditors for the purposes of the statutory jurisdiction.
38.	I was assisted in this regard by reference to three decisions of Mr Justice Norris: In the matter of Castle Holdco 4 Limited [2009] EWHC 3919 (Ch), In the matter of Gallery Capital SA and In the matter of Gallery Media Group Limited [2010] WL 4777509. None of those schemes was opposed, so the Judge did not have on either occasion the benefit of dialectic argument, but nevertheless the conclusion that he reached (which was that in the particular context the beneficiaries could be treated as contingent creditors and that as such they could be treated as creditors for the purpose of the relevant provision in the Act) seems to me to be both logical and justified. I say that with diffidence, but his reasoning seems to me to be entirely justified.
39.	I note also that in the case of Re T&N Limited and others [2005] EWHC 2870 (Ch) Mr Justice David Richards included contingent creditors within the definition of creditors. That appears also to be justified by subsequent authority: the right of those beneficially interested to call for the  legal interest is analogous to the position of a contingent creditor
40.	I have stressed that my conclusion in that regard is case-specific, it being the case here that the beneficiaries have an absolute right to require the Bank to issue definitive notes directly. It seems to me that since there is such a mechanism to trigger a direct right and therefore obtain control over that contingency, which is defined, they are properly described as contingent creditors and thus as creditors for the purposes of the relevant provision of the Act.
41.	That, I think, suffices for present purposes and at this preliminary stage. I apologise for the length of this judgment, but I hope it provides a reasonable summary of the reasons why I accede to the application for a single class meeting. The only thing I need add is to express my gratitude for the help also provided to me by Mr Mark Phillips QC on behalf of the LT2 Group and Mr Arden QC on behalf of Law Debenture, the relevant trustees.