England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/12/2004

Mr Justice David Richards :

1. T&N Limited and 133 subsidiaries are in administration. They have since 1998 been part of a larger group with Federal-Mogul Corporation (FMC) as its ultimate holding company. FMC and 22 of its US affiliates, and T&N and its English subsidiaries, are subject to proceedings under Chapter 11 of the United States Bankruptcy Code. The background is explained in a judgment which I gave on 21 October 2004 (the October 2004 judgment).
2. The fact that T&N and its subsidiaries are subject to parallel proceedings under the insolvency laws of England and the United States has led the administrators and various creditor groups to appreciate that it might become necessary or desirable for the two courts principally involved, the High Court here and the United States Bankruptcy Court for the District of Delaware (the US Court) to communicate with each other. In order to provide a framework for any communications between the courts which would ensure fairness for all interested parties, the administrators and the Plan Proponents, whose position I describe briefly below, applied to both courts for approval of a protocol entitled Procedures and Issues for Inter-Court Communications (the ICCP). It was approved by the US Court and by this Court on 19 November 2004.
3. The application now before me is made by the Plan Proponents and, in accordance with the terms of the ICCP, seeks an order for direct communication between the two courts. The communication would relate to the estimation of the total amount of current and future asbestos-related personal injury claims against the T&N companies. It proposes that communication should be by conference call. A similar application was filed with the US Court on 23 November 2004. His Honour Judge Lyons, who is the judge of the US Court dealing with these cases, made an order on 3 December 2004 for such communication, subject to the approval of this Court.
4. It is the massive scale of asbestos-related claims which has led to the administration and Chapter 11 proceedings. The purpose of the Chapter 11 proceedings is, if possible, the development and approval of a plan of reorganisation, providing a compromise solution to the companies' asbestos and other liabilities and allowing them to continue in business. A plan of reorganisation (the Plan) has been developed by the Plan Proponents, who are official committees appointed in the United States to represent various creditor groups and also the management of the US and UK debtor companies. The Plan and disclosure statement were despatched to creditors in July 2004 in a form approved for that purposes by the US Court. Creditors were entitled until November 2004 to register their votes for or against the Plan. The Plan is then subject to a confirmation hearing in the US Court. If and when confirmed by the US Court it becomes binding under US law on all the debtor companies, their creditors and shareholders.
5. I described the essential features of the Plan in the October judgment. The shares of common stock of the reorganised FMC would be divided between an Asbestos Trust and a trustee for the bondholders in the proportion of 50.1:49.9. Using provisions under Chapter 11, the US and UK debtor companies would be released from their asbestos-related liabilities, all of which would be channelled to the Asbestos Trust. The principal assets of the trust would be its holding of shares in reorganised FMC and the proceeds of insurance recoveries, which I should add are nowhere near sufficient to meet any estimate of the likely level of liabilities. The claims of other creditors would be dealt with as set out in the Plan.
6. In order to give effect to the Plan, and for the purposes of meeting US legal criteria for its confirmation, it is necessary to estimate the value of the companies' asbestos liabilities. This arises in a number of ways. First, the Asbestos Trust's shareholding will be attributable to two sub-funds, one for asbestos claimants against the UK debtor companies and the other for asbestos claimants against the US companies. In order to fix the correct ratio between the two funds, it is necessary to arrive at an estimate of the value of present and future claims against the two groups of debtor companies. At present the Plan document attributes 79% of the shares to the UK debtor sub-fund.
7. Secondly, the value attributed to the asbestos liabilities is one of the principal factors which under the Plan drives the return to other creditors of some of the debtor companies. The return to asbestos claimants is for these purposes taken to be the value of the shareholding in reorganised FMC divided by the estimate of their claims. If the Plan is rejected by any class of creditors whose claims are affected by it, there must be no unfair discrimination between similarly placed creditors. The US Court must be satisfied that under the Plan all such creditors are treated approximately the same.
8. Thirdly, in order to satisfy the requirements of section 1129(a)(7) in Chapter 11 of the Bankruptcy Code, the return under the Plan to creditors who have not accepted the Plan must be at least as good as the return in a liquidation.
9. When administration orders were made in respect of the UK companies in October 2001, it was envisaged that the lead role in developing a solution would be taken in the Chapter 11 proceedings. It was recognised that although a plan of reorganisation, if confirmed, would have worldwide effect under US law, it would require schemes of arrangement and/or company voluntary arrangements to make it fully effective under English law as regards the UK companies and their creditors. The promotion of such schemes and CVAs was the purpose for which administration orders were made. In the light of the differences over the Plan to which I refer below, the administration orders were amended by Lindsay J in July 2004 to include, as a further and alternative purpose, a better realisation of the assets of the companies than could be achieved in a winding-up. This recognised the possibility that the Plan would not be implemented in the UK. It must, however, be emphasised that neither set of insolvency proceedings is ancillary to the other. As English-incorporated companies, with the bulk of their assets in (or controlled from) England and a substantial body of UK-based creditors there is no question of the English administration proceedings being ancillary. Equally, the US Court under its insolvency regime exercises a full jurisdiction over companies which have filed proceedings under Chapter 11.
10. As detailed in the October 2004 judgment, serious divisions have appeared among creditor groups as to the terms of the Plan. Important UK-based creditors, including the trustees of the T&N pension scheme which faces a substantial deficit and the UK-based asbestos claimants, have objected to the terms of the Plan. If it was sought to implement the Plan in England by schemes of arrangement or CVAs those creditors would be likely to oppose them. The division of view does not entirely follow national boundaries. Although the Plan is proposed by the principal US creditor groups, particularly the asbestos claims committee and the bondholders, the official committee of US asbestos property damage claimants objects to the terms of the Plan.
11. The administrators take the view that there are serious deficiencies in the Plan which render it unfair, and unless all the creditor groups back the Plan they do not presently consider that they should propose schemes or CVAs to implement it. In October 2004 I directed that they should not take steps to promote schemes or CVAs without further application to this court.
12. There are a number of fundamental issues on which the parties are divided. One of them is the appropriate estimate of current and future asbestos claims. In the October 2004 judgment, I gave some detail of the different estimates which have been produced, but I was not invited to express any views on them. When the companies filed under Chapter 11, the estimate was $1.6 billion, and this was also put forward in the report in support of the application for administration orders. The actuarial expert engaged by the Asbestos Claimants Committee, Dr Mark Peterson, produced an estimate of approximately $6.5 billion in a report in October 2002. This was subject to serious criticism by the Official Committee of Commercial Creditors (principally the bondholders) in October 2003. In a memorandum dated 19 February 2004, Dr Peterson revised his estimate to nearly $11 billion, on the basis of using, as the value of individual categories of claims, the figures negotiated between the members of the Asbestos Claimants Committee and incorporated in the trust distribution procedures in the Plan. Dr Peterson has increased this estimate to over $11 billion in a further report dated 29 November 2004. The Plan in its current form defines the ratio for determining the returns to creditors of T&N Limited by reference, among other things, to the tort system value (as reflected in the Plan's trust distribution procedures) of all asbestos personal injury claims against T&N Limited. The disclosure statement states that "[t]he Plan Proponents estimate that the percentage recovery that would result from application of T&N Distribution Ratio 1 is 7.2%". This is on the basis of Dr Peterson's estimate in February 2004 of nearly $11 billion for asbestos liabilities.
13. Other reports have been prepared. The administrators engaged EMB Consultancy Limited whose report concluded that the estimate should be of the order of $5.3 billion but subject to the qualifications in para 2.1.10 of their report. The trustees of the T&N pension scheme commissioned a report from Tillinghurst which produced an estimate of US claims in the range of $2.15.5 billion. The Official Asbestos Property Damage Committee has retained Navigant Consulting Inc and its report dated 30 November 2004 estimates the present value of US asbestos personal injury claims against T&N at about $2.2 billion.
14. The issue of the amount of asbestos personal injury claims is already before the US Court. It appears that for a long time the Plan Proponents hoped to avoid the need for any formal estimation, at most relying on one or more expert reports to justify the figure of $11 billion in the Plan. However, in November 2004 they decided a formal estimation was required. On 15 November 2004 the Legal Representative for Future Asbestos Claimants appointed by the US Court applied for a case management order. An order made on 23 November provides for the estimation of all asbestos claims and demands against T&N and its subsidiaries. The order provides for the production of expert reports by 30 November 2004, depositions on 2 and 3 December, the filing of briefs by 6 December and motions and responses by 8 December, with the hearing fixed for 9 and 10 December 2004. I have been told that the Official Committee of Asbestos Claimants and the Legal Representative for Future Asbestos Claimants support Dr Peterson's estimate but that the debtor-in-possession management is not putting forward any figure of its own.
15. The purpose of the Plan Proponents' present application is to initiate a direct communication between the US Court and this court regarding the process for an estimation of the aggregate amount of current and future asbestos personal injury claims (the asbestos claims) against the UK debtors and the purposes for which such determination should be used. They correctly state that the estimation of the asbestos claims is a critical issue in the Chapter 11 cases and that it is one of the principal factors preventing the Plan from progressing on a consensual basis.
16. So stated, this is therefore an issue for the US Court but the Plan Proponents go on to submit that estimation is a matter which should also be resolved in the interests of the administration proceedings. It is submitted that resolution of this issue, by removing one of the principal areas of difference, will enable the administrators to assess the viability and desirability of schemes of arrangement and CVAs to implement the Plan. They suggest that this can and should be achieved by a consistent resolution in a manner which is recognised as appropriate by both courts.
17. In their skeleton argument for this hearing, the Plan Proponents' expectations were stated in these terms:

"The Plan Proponents hope that the proposed communication will lead to the determination of an issue which will be useful in both insolvencies (albeit for different reasons) in circumstances where the courts are agreed that the issue is suitable for determination in a particular court. If a determination of the issue is made (in whole or in part) by either of the T&N Insolvency Courts, it should be recognised by both T&N Insolvency Courts as binding on the Parties as far as is possible and so far as relevant. For example, it must be objectionable that a determination by the US Court of an issue recognised by the English Court as being one of US law and which arises in the context of the administration process is a matter which either party should be able to continue to contest (whether before the English Court or within the administration process). The aggregate quantum of the US law governed Asbestos Claims is such an issue."

More specifically, the skeleton states that:

"The Plan Proponents believe that the most appropriate and economic allocation of tasks with respect to the estimation of the Asbestos Claims against the UK Debtors is for the US Court to estimate the amount of asbestos claims of US claimants, and for the English Court to estimate the amount of asbestos claims of UK claimants, and for each Court to accept the determination of the other with respect thereto as far as is possible. In this way, both Courts will deal with matters governed by their own laws."

And:

"the Plan Proponents envisage that the immediate consequences of any determination by the US Court of the quantum of US law governed claims is that the Administrators should be directed to adopt such a determination for the purpose of assessing whether they will propose parallel schemes of arrangement and CVAs. By itself, this will undoubtedly be inconclusive. But the question of the amount of claims as a matter of US law should not be reconsidered."

18. In his oral submissions Mr Dicker, for the Plan Proponents, emphasised that they were not at this stage seeking a direction that the decision of one court would be binding on the other. The aim of the communication would be to identify the issues which were relevant to both jurisdictions and to ensure that the process in one court or another to estimate asbestos claims was, to the maximum extent possible, likely to be recognised and given effect to by the other court. Mr Dicker suggested that following the communication the Plan Proponents might apply to this Court for a direction that the administrators participate in the estimation proceedings in the US Court and present all relevant evidence and submissions to that court, so that they would be bound on the basis of issue estoppel or otherwise by the decision of that court.
19. The administrators have made clear that they would strongly oppose any such direction. They do not oppose a communication to the US Court which identifies and explains issues of English law and procedure which would arise in an assessment of the likely level of admissible asbestos claims in an English winding-up of the relevant companies. They do however oppose any communication between the courts which is designed to ensure so far as possible that the process in the US Court led to a decision likely to be recognised as binding by this Court. They are supported in that stance by the trustees of the T&N pension scheme and the UK asbestos claimants.
20. The administrators point out that the issue of the likely overall level of asbestos claims will not arise for consideration by the English Court, unless and until attempts are made to promote schemes of arrangement or CVAs in England to give effect to the Plan. Under the relevant statutory provisions, it is only the administrators who may promote schemes of arrangement or CVAs. Whether or not to do so is a matter for the judgment of the administrators, subject to review by the courts. It is submitted by the administrators that the court would interfere with their decision only if made without proper grounds. I have not heard arguments on that submission and make no comment on it.
21. If the issue of an overall figure for asbestos liabilities does arise for consideration, the position of the administrators, and the pension fund trustees and UK asbestos claimants, is that it should be decided by the English Court as a matter relating directly to a winding-up in England of English companies. I should mention that Dr Peterson's reports do not appear to be directed to the likely level or value of claims which would be admitted to proof in an English winding-up of T&N and its subsidiaries. They appear to be directed to a present-day valuation of the claims either on the basis that they are in due course pursued to judgment or settlement in the United States or on the basis of distributions under the trust distributions procedures provided for by the Plan.
22. Although the Plan Proponents submit that this Court could give directions to the administrators which would render the decision of the US Court binding on them, they accept that the pension fund trustees and the UK asbestos claimants cannot be bound by it. They do not intend, and in some cases do not have the financial means, to participate in the US proceedings. If the issue becomes relevant in the English Court they would intend to appear and argue the issue.
23. The Plan Proponents helpfully prepared a first draft of an agenda of issues which might be discussed in a conference call between the Courts. The purpose, as I have already stated it, is to ensure that the process to estimate asbestos claims is, to the maximum extent possible, likely to be recognised and given effect to by the US and UK Courts. The matters suggested for discussion include the methodology for determination of the quantum of claims according to their governing law, with specific reference to issues in relation to the actuarial evidence, a liquidation comparison for the UK companies and whether estimation should be on a company-by-company basis. Also suggested for discussion are the proper law of the asbestos claims and the differences, if any, in the laws applicable to the estimation of asbestos claims in the two jurisdictions, including breach of duty, causation, remoteness and quantification. Further topics are choice of forum and further procedural steps. At my invitation, the administrators commented on this draft agenda and suggested amendments to it.
24. Both the underlying purpose of a conference call as explained by the Plan Proponents and many of the issues in their draft agenda are matters of great controversy between the parties represented on this application. Mr Dicker made clear in his submissions that the Plan Proponents see, as a principal purpose of the communication, assistance in making the US Court's decision on the estimate of asbestos liabilities as binding as it is capable of being and that the two judges should discuss whether the issue is best resolved in the US or the English Court. As he put it, one purpose of the communication is to determine what should be done; if not that, then the thrust of his submissions was that the communications would assist the courts in separately deciding what is to be done. The issues could at least be the subject of discussion between the Courts. As Mr Sheldon for the Official Committee of Asbestos Creditors put it, the system of communication should be used to break an impasse.
25. The problem is that it is these highly controversial issues, including the issue of whether the decision of the US Court should be binding on the administrators, which are likely to be the subject of application to this court. In these circumstances it would not in my view be appropriate for me to discuss those issues, with a view to finding or laying the ground for a common or binding resolution, with the US Court. If any constructive step were to come out of it, it is liable to have the effect of pre-empting to some extent the later proceedings on those issues in this Court. There would exist, as it seems to me, a real risk of pre-judging those proceedings or appearing to do so. Even a general discussion with the US Court on these issues carries these risks,
26. At root I do not consider it appropriate for this Court to enter into substantive discussions with the US Court on matters of controversy between the parties which may come before the Court for decision. As and when appropriate, the Court should hear argument on the relevant issues and give its judgment on them. In the light of that judgment, inter-Court communications may be appropriate.
27. In adopting this approach, I am not seeking to nullify the process for inter-Court communications before they have even started. That is not my intention. As I have said more than once already, I support the view that inter-Court communications can have a vital role to play in major cross-border insolvencies such as these and I fully endorsed the efforts of the administrators and Plan Proponents to establish the formal procedures contained in the ICCP. But in considering an application for inter-Court communications the courts must necessarily proceed on a case-by-case basis, balancing the desirability of inter-Court communications against other relevant factors. The circumstances of this particular application have led me to conclude that a direct inter-Court discussion of the issues would not be appropriate at this stage.
28. In reaching my conclusions on this application, I have been very grateful for the judgment of Judge Lyons given on 3 December 2004 and I have given it the most careful consideration. On the Plan Proponents' application to him under the ICCP, he authorised a joint communication which he considered should go to substantive matters. In his judgment he explains clearly the reasons why an estimation of the overall asbestos liabilities is required in order to decide whether the Plan should be confirmed. He notes that the likely return for creditors in a liquidation of the UK companies under Chapter 7 of the US Bankruptcy Code may well be governed by the return available in an English insolvency proceeding, as the assets are within the ultimate control of the English administrators. He notes the disagreement between the Plan Proponents and the administrators and states that a judicial hearing of the issue could resolve it or help to do so, and assist in leading to agreement on the Plan. He continues:

"So where the parties have been unable to reach a consensual agreement, I believe that the intervention of a judicial officer can help them do that. And certainly it is important to proceed with the Plan's reorganization here to estimate the exposure of all these debtors to asbestos personal injury claims.

Now, whether I make all the determinations here that are appropriate in the US cases, whether I rely upon the English Court to decide some part of the issues as the Plan Proponents suggest, i.e. the extent of UK asbestos personal injury claims, is a matter that we can take up when we have the joint communication.

But in light of the central role that the estimate of US asbestos liabilities, or should I say the estimate of all personal injury asbestos liabilities plays in the concerns of all parties, it's important to do that if it can be done. So that it is useful, that the determination is useful on both sides of the Atlantic, it seems to me that makes sense to do that."

I do not in anyway underestimate the importance of the points made by Judge Lyons. However, for the reasons which I have tried to explain, I do not think that on this particular matter it would be right for me to enter into direct discussions at this stage.

29. I am however anxious to give to the US Court any assistance which this Court can provide. It is clear from the judgment of Judge Lyons that the US Court will have to come to a conclusion on likely returns in a liquidation which will involve consideration of questions of English insolvency law and procedure. I accept Mr Dicker's submission that this is an area in which this Court can provide assistance, by informing the US Court of issues which may arise. As I mentioned earlier, Mr Arden for the administrators accepted that this was a proper area for cooperation. It might be objected that the US Court could be informed of these issues in the usual way through expert evidence but I think this can be achieved more simply and directly. The administrators have agreed to provide a draft list and explanation of the issues. It will be circulated to the other parties and to me. The other parties will be able to comment on it, and I hope they will do so if they feel that changes or additions will further assist the US Court. It cannot debar any party from relying on other matters at any hearing in this Court but, as I explained, I expect the parties to raise all issues of substance of which they are aware. I see this Court's role as indicating that the points raised are points of substance. I will give directions for communication of the final form of this document to the US Court.