England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

		Civil Justice Centre 1 Bridge Street West Manchester
		31st July 2008

His Honour Judge Pelling QC:

Introduction:

1. Beloit Walmsley Limited (the Company) entered administration on the 22^nd November 1999 and a Company Voluntary Arrangement (CVA) was approved on 17^th April 2001. The joint administrators of the administration are also the joint supervisors of the CVA. By this application the joint administrators and supervisors (JAS) seek directions as to their entitlement as supervisors of the CVA to distribute funds in their hands as such and also funds in their hands as Administrators exclusively to the CVA creditors notwithstanding that there may be contingent creditors of the Company who are not party to or bound by the CVA and/or creditors of the Company who would not have been entitled to prove as unsecured creditors of the Company had it entered into liquidation on 22 November 1999 and for a declaration that the trust alleged to have been created by the CVA remains in place until the Scheme assets have been either distributed by the supervisors or paid into court pursuant to the terms of the CVA. These applications are opposed by Financial Services Compensation Scheme Limited (FSCS) on the ground that what is proposed does not represent the effect of the CVA on its true construction and/or on the basis that the court has jurisdiction by direction to authorise the JAS to distribute otherwise than in accordance with the strict terms of the CVA or in any event can give directions to the JAS as administrators to distribute the sums remaining in their hands to creditors generally rather than merely to the CVA creditors. In the alternative, an application has been made by FSCS for relief pursuant to Section 6(1) of the Insolvency Act 1986 (IA) and for an extension of time in which to make that application, it being common ground that the application has been brought outside the time limits that are fixed for the making of such an application by IA, Section 6(2).
2. In addition, the JAS apply for directions in relation to 6 potential creditors who were included in the directors' statement of affairs but who have not submitted proofs despite having been invited to do so. FSCS did not have any interest in this application which I dealt with separately after the conclusion of the submissions in relation to the applications referred to in paragraph 1 above. This judgment is concerned solely with the applications referred to in paragraph 1 above.

Background

3. None of the essential background to which I now refer is in dispute. Prior to its collapse, the Company was a well established company whose business was the manufacture of machines for the processing of pulp paper and paper board. These processes brought employees into contact with asbestos. Between 1920 - 1988, the Company was insured in respect of employee liabilities by Chester Street Holdings Limited (Chester Street) the successor to the well known Iron Trades insurer. Chester Street is now insolvent and is subject to a scheme of arrangement. FSCS is the Scheme Manager of the FSA's statutory fund of last resort for customers of financial services organisations established pursuant to Section 213(1) of the Financial Services and Markets Act 2000 and as such has been required to meet a number of personal injury claims made by former employees of the Company or the estates of such former employees for personal injury or death caused by the inhalation of asbestos dust in the course of their employment by the Company. Where this has occurred, in accordance with its usual practice, FSCS has taken an assignment of the rights of the employee or employee's estate against the Company. To date FSCS has paid out or anticipates paying out in excess of £240,000 in respect of relevant claims in respect of which FSCS seeks to make a recovery from the Company.
4. As is now well known, the diseases that are caused by exposure to Asbestos dust do not manifest themselves in the form of physically identifiable symptoms for many years after exposure occurs. As David Richards J observed in Re T & N Limited [2005] EWHC 2870 (Ch) [2006] 1 WLR 1728 (T&N) at paragraph 102 of his judgment: "Since the Limitation Act 1963, the important question for limitation purposes has been the claimant's knowledge of his condition.". In the nature of things, it is likely therefore that claims may be commenced by relevant employees many years after they ceased to be employees of the Company.
5. It is common ground that such an employee could commence proceedings based both on contract and tort for as David Richards J said in T&N "... a former employee ... who was exposed to asbestos during his employment and who develops a compensatable disease or condition ... will unquestionably be entitled to prove for an unliquidated claim for his loss on the basis of breach of a contractual duty owed to him ..."
6. On 22^nd November 1999 an Administration Order was made in respect of the Company and the JAS were appointed its Administrators. The purposes for which the Administration Order was made were those set out in s.8(3)(a)(b) and (d) IA86, namely:

'(a) the survival of the company, and the whole or part of its undertaking, as a going concern;

(b) the approval of a voluntary arrangement under Part I; ...

(d) a more advantageous realisation of the company's assets than would be effected on a winding up.'

On 17^th April 2001 the Company's creditors approved the CVA which had been proposed by the JAS then acting as the Company's Administrators. The CVA was approved as the mechanism for enabling the proceeds of assets realised in the course of the Administration to be distributed. During the course of the Administration the business and assets of the Company have been disposed of and total asset realisations amount to £32,647,551. Creditor claims received (not all of which have been agreed or admitted) total £48,281,405. To date sums totalling £21,940,795 have been received into the CVA. There remains in the CVA account the sum of £6,205,536.82 which means that interim dividends totalling in excess of £15 million have been paid out to date.

7. The CVA was approved prior to the amendment of IA Section 5 by the Insolvency Act 2000. As it is now formulated, IA Section 5(2(b) provides that a CVA binds not merely those who would have been entitled to vote at the meeting at which it was approved but also those who would have been entitled to vote at such a meeting if they had received notice of it. However, the latter category was added by the Insolvency Act 2000 and the relevant provision took effect only from 1^st January 2003 - see Insolvency Act 2000 (Commencement No.3 and Transitional Provisions) Order 2002. In its un-amended form, IA Section 5, provided that a CVA would bind only those "... who in accordance with the rules had notice of and [were] entitled to vote at ..." the meeting at which the CVA was approved. It follows that someone who was a creditor at the time but who did not receive notice of the meeting would not be bound by the CVA and would therefore not be a CVA creditor. It was common ground for the purposes of the present application that T&N decides that those who had been carelessly exposed to asbestos with exclusively tortious claims were contingent creditors and thus creditors for the purpose of IA Section 3. Such persons would therefore technically be entitled to receive notice of a meeting at which a CVA proposal was to be considered in accordance with IA Section 3(3). However, since such persons would probably not know they were contingent creditors and that fact was probably not known to those issuing the notices, it follows that some at least of such persons did not receive notices and so technically are not CVA creditors even though they have subsequently developed or may in the future develop compensatable diseases attributable to their employment by the Company.
8. The JAS intend to exercise what they contend to be the limited discretion afforded to them by Regulation 7.1.2 of the CVA (see paragraph 9.25 below) and admit to the CVA those creditors who would have been entitled to participate in the CVA but for the fact they did not receive notice of the meeting providing they had suffered an injury as at 22^nd November 1999.The reason for this last qualification is that the structure of the CVA was to equate (as closely as possible) the claims of creditors in the CVA with the position which would have existed had the Company entered liquidation on 22 November 1999 ('the Relevant Date'). That being so, it is said that someone who had not suffered an injury on that date would not have had a provable claim in tort had the company been placed in liquidation as at that date. This will not be relevant to those who have concurrent claims in tort and contract (because the cause of action accrued at the point when exposure to asbestos in breach of duty occurred) but will have an impact on those who have only a tortious claim since by Rule 13.12 of the Insolvency Rules (IR) as it was formulated at the date when the CVA was approved, a cause of action in tort had to have accrued at the date when a company went into liquidation if it was to be provable in the liquidation. As was held in T&N those with a purely tortious claim who had not suffered damage at the date when a company was placed in liquidation could not prove in that liquidation. In T&N (as here) it was argued that this gave rise to absurdity and injustice. David Richards J rejected that submission because he considered that "... a deliberate policy choice was made to use the liquidation date as a cut off point for causes of action in tort. There are reasons for this choice. It will generally produce greater certainty, it may permit a liquidation to be brought to an earlier conclusion and it may be regarded as consistent with the principle that all claims are to be identified and valued as at the liquidation date". Following that decision IR Rule 13.12 was amended so as to add IR Rule 13.12(2)(b) which had the effect of negativing the conclusions reached in T&N - see Insolvency (Amendment Rules 2006. However this amendment only took effect from 1^st June 2006.
9. FSCS opposes the position adopted by the JAS because if right it would preclude FSCS from recovering anything in respect of its outlay by reference to the assignments to which I have referred in relation to claimants with exclusively tortious claims which accrued after the relevant date. FSCS submitted (a) on true construction of the CVA, it was sufficiently widely drawn to include as CVA creditors persons with contingent tort claims that accrued after the relevant date with the result that the funds held by the JAS are held on trust for all creditors including those with such contingent tort claims; (b) to the extent necessary I should depart from T&N which is not binding upon me because, it is submitted, David Richards J's analysis of the policy issues to which I have referred cannot survive the amendment of IR Rule 13.12(2) which overturns the conclusions reached by David Richards J and/or (c) in any event, I ought to direct that the JAS as supervisors should hold the remaining CVA funds for the benefit of and/or distribute such funds to all creditors including those with contingent tort claims that accrued after the relevant date or alternatively that I ought to direct the JAS as administrators that those sums still held in the Administration accounts should not be credited to the CVA account but should be held for the benefit of and/or distributed to all creditors including those with contingent tort claims that accrued after the relevant date. Finally, in the event that I conclude I am not able to accede to any of these submissions, it is submitted that I ought to extend the time for FSCS to make an application under IA Section 6 and make an order under either IA Section 6(4)(a) or (b).

The Relevant provisions of the CVA

10. The relevant terms of the CVA are as follows:

10.1. 'the Arrangement Funds The funds paid in accordance with paragraph 3.2 or any additional funds paid under the terms of the Arrangement' [Paragraph 1.2];

10.2. 'the Preferential Creditors The Preferential Creditors of the Company whose claims are accorded priority in accordance with section 4(4)(a) and defined and calculated at the Relevant Date pursuant to Section 4(7) of the Act' [Paragraph 1.2]

10.3. 'the Unsecured Creditors the Creditors of the Company, who would be entitled to prove in any liquidation in the event that the Company was wound up but excluding the Preferential Creditors' [Paragraph 1.2];

10.4. 'the Regulations set out in Appendix III and forming part of the Proposal [Paragraph 1.2];

10.5. 'The appendices set out in paragraph 1.4 form part of the Proposals' [Paragraph 1.3];

10.6. 'Appendix IV Matters that are required, by Rule 1.3(2) of the Rules, to be stated or otherwise dealt with' [Paragraph 1.4];

10.7. 'To facilitate the payment in full of Preferential claims and the distribution of dividends to Unsecured Creditors, it is necessary for the Company in Administration to enter into either liquidation or a CVA' [Paragraph 2.2];

10.8. 'It is considered that the interests of creditors are best served by entering into a CVA as the costs associated with liquidation are considerably higher. The CVA can be implemented immediately whilst a liquidation would not commence until the Administrator had realised all of the remaining assets' [Paragraph 2.5];

10.9. 'Details of the CVA proposals are set out in paragraph 3 below. The Proposal provides for the net realisations in the Administration to be distributed to creditors in the same way as would occur if the Company were in liquidation. The CVA will enable quicker distribution of dividends to creditors. CVA costs will be at least £350,000 lower than those incurred in a liquidation' [Paragraph 2.6];

10.10. 'The Joint Administrators propose that the Joint Supervisors of the Arrangement will:

(a) Formally agree the claims as creditors (some claims have already been informally agreed by the Joint Administrators);

(b) Receive funds passed to them by the Joint Administrators;

(c) Distribute the funds received from the Joint Administrators in accordance with the terms of the Arrangement' [Paragraph 3.1.1];

10.11. 'The Joint Supervisors will make further interim dividends to Unsecured Creditors as and when further funds are received from the Joint Administrators.' [Paragraph 3.1.4];

10.12. 'It is proposed that in calculating the amount available for distribution, the Joint Supervisors will retain sufficient funds to pay declared dividends to creditors whose claims:

(a) Have been notified to the Joint Supervisors but have not yet been agreed.

(b) Are contingent and have yet to be finalised, that the Joint Supervisors are aware.

The Joint Supervisors will estimate the value of unagreed or contingent claims that have been made, in calculating the retained fund [Paragraph 3.1.5];

10.13. 'The assets to be comprised in the Arrangement will be the sums of money currently held by the Joint Administrators (less Administration costs outstanding), plus the net proceeds from any future realisations' [Paragraph 3.2.1];

10.14. 'The assets will be distributed to creditors in accordance with the following general principles;

(a) Scheme assets shall, subject to discharging the remuneration of the Joint Supervisors and to meeting all costs, charges and expenses incurred in implementing the Arrangement, be distributed to creditors who were creditors of the Company on the date of appointment of the Joint Administrators on 22 November 1999.

(b) Scheme assets shall be distributed to such persons and in such proportions as the assets of the Company would be distributed if the Company was being wound up and such winding up had commenced on 22 November 1999.: [Paragraph 3.2.2];

10.15. 'The Joint Supervisors will distribute money passed to them by the Joint Administrators as soon as reasonably possible after it has been received. The Joint Supervisors will make distributions to creditors at such time and in such amount as they consider appropriate. All funds held will be placed on interest bearing bank accounts for the benefit of general body of creditors' [Paragraph 3.2.3];

10.16. 'It is proposed that the Arrangement will continue until all funds from the Administration have been distributed. The Administration will continue until such time as substantially all of the Company's assets have been realised. Creditors will be kept advised on the progress of the asset realisations by way of the statutory reporting requirements of the Joint Administrators. In the intervening time all funds not immediately required for the day to day requirements of the Joint Administrators will be held on interest bearing bank accounts.

The Joint Supervisors may at any time apply to the court for an order terminating the Arrangement on such terms as the court thinks fit. Without prejudice to any order the court may make, the Joint Supervisors will, subject to discharging their own remuneration and meeting all costs, charges and expenses incurred in implementing the Arrangement, pay any monies in their hands on termination of the Arrangement to the liquidator or, the Administrators of the Company' [Paragraph 4.1];

10.17. 'None of the Company's assets are charged in favour of any creditor. All unrealised assets are to be excluded from the Arrangement and realised by the Joint Administrators. There are no assets of persons other than the Company to be included in the Arrangement' [Paragraph 5.2];

10.18. ' 'These regulations are an integral part of the Proposal. Should there be any conflict or ambiguity as between the Proposal and the Regulations, then the Proposal shall prevail' [Regulation 1.1];

10.19. 'As soon as possible after the approval of the Arrangement the Joint Supervisors shall send a notice to each person shown as a creditor in the Proposal or Statement of Affairs, requiring the provision of such details of the amount claimed to be due from the Company as the Joint Supervisors may need [Regulation 6.1];

10.20. ' 'The Joint Supervisors shall:

send a similar notice to any other person to whom they believe the Company may be indebted; and

be entitled but not obliged to insert a similar notice in such newspaper or other publications as they consider appropriate' [Regulation 6.2];

10.21. 'Rule 4.182(2) of the Rules shall apply to the Proposal' [Regulation 6.3]

10.22. 'If any dividends remain unclaimed when the Joint Supervisors issue the Completion Certificate, they shall pay such amounts into court and the Joint Supervisors will not be liable to these Creditors in respect of unclaimed dividends' [Regulation 6.4]

10.23. 'Rule 4.73 to 4.94 of the Rules inclusive shall apply to the Proposal except that:

references to proving or claiming to prove shall be taken as references to the submission of a claim calculated in accordance with the terms of this Proposal the reference to Section 98 should be read as a reference to section 3 references to the Liquidator shall be read as references to the Joint Supervisors' [Regulation 6.5];

10.24. 'The creditors shall not be entitled to receive any payment or dividend from the Joint Supervisors or any other person under the terms of the Arrangement unless:

they are bound by the Arrangement;

the Joint Supervisors have admitted their claims for the terms of participation in any

payment or dividend under the Arrangement' [Regulation 6.6];

10.25. 'Unless otherwise provided for in the Proposal or if the context of the Proposal otherwise demands:

In the event that additional claims are notified to the Joint Supervisors after the commencement of the Arrangement, they may, at their discretion, admit these as if the creditors concerned had received notice of the Meeting of Creditors convened to consider the Proposal provided that the additional creditors agree in writing to be bound by the terms of the Agreement' [Regulation 7.1.2];

10.26. 'It is proposed that the Arrangement will continue until such time as all funds from the Administration have been distributed [Regulation 8.1];

10.27. The joint supervisors shall do all [things] necessary to give effect to the Proposal as accepted by the creditors and, subject to the Company's rights and those of the creditors contained in Section 7(3) of the Insolvency act 1986 and are authorised to take such action and enter into such agreements as they see fit in order to protect the best interests of those concerned in the Arrangement, notwithstanding that such action may differ from the course of action anticipated in the Proposal [Regulation 9.1]

10.28. 'If the Joint Supervisors are, for whatever reason, uncertain as to what action they should take in any situation they may within their own discretion:

apply to the Court for directions' [Regulation 9.3];

10.29. 'The Joint Supervisors shall receive and hold the Arrangement Funds upon trust to employ such funds only for the purposes of the Arrangement'. [Regulation 12.1]; and

10.30. 'These references correspond with those appearing in Rule 1.3(2)

(a) (i), (ii) and (iii) The assets, none of which are charged in favour of any creditors, and an estimate of their values are shown in Appendix I. The Company's assets are excluded from the Arrangement but they will be realised by the Joint Administrators for the benefit of the Arrangement.

(b)The Joint Administrators will provide the Arrangement Funds.

(e)The Arrangement will remain in force until all of the funds from the Administration have been distributed.

(f) Any funds held for the purpose of payment to the creditors not so paid on the termination of the Arrangement will be dealt with in accordance with the Regulations' [Appendix IV].

The Construction of the CVA

11. Ms John's submission was that on a proper construction of the CVA, creditors for the purpose of the CVA included contingent creditors with claims in tort that accrued after the 22^nd November 1999. Ms John contended this to be so because a number of references in the CVA to "creditors" referred on proper construction to a wider body of persons than those defined in the agreement as being either Preferential Creditors or Unsecured Creditors. It was submitted that the primary provision within the CVA for present purposes was Clause 3.2 (Paragraphs 10.13-10.15 above). Ms John submitted that the effect of clause 3.2.3 was that the JAS held all sums received by them as supervisors under the CVA on trust for the "... general body of creditors ..." and that the preceding sentence gave the JAS a discretion only as to time and amounts to be distributed but imposed an obligation to "... make distributions to creditors ..." which it was submitted meant the general body of creditors and not some narrower class of creditors.
12. I reject that submission for the following reasons. First, I take it to be trite that in construing a document regard has to be had to the whole, of the document and all of its provisions. The submission ignores entirely the effect of clause 3.2.2. This clause comes before clause 3.2.3 and in my judgment defines very clearly who "creditors" are for the purposes of clause 3.2 as a whole. They are persons who were "(a) ... creditors of the company on ... 22^nd November 1999 ..." to whom "(b) ... the assets of the Company would be distributed if the Company was being wound up and such winding up had commenced on 22^nd November 1999". It is common ground that this does not include persons with contingent claims in tort that had not accrued at 22^nd November 1999 because such contingent debts were not provable as at the date when the CVA was agreed by operation of the un-amended Rule 13.12 of the Insolvency Rules 1986 as construed by David Richards J in T&N. It was this unamended rule which David Richards J held to reflect a deliberate policy choice.
13. In my judgment this analysis is supported by Clause 3.1 of the CVA which contains the core proposal that was accepted at the IA Section 3(2) meeting. Clause 3.1 required the agreement of claims by "creditors", the receipt of funds and then the distribution of"... the funds received from the joint administrators in accordance with the terms of the Arrangement". Distribution was governed by Clause 3.1.2 (which relates to Preferential Creditors as defined in the CVA) and clause 3.1.3 (which relates to Unsecured Creditors as defined in the CVA) as well as by Clause 3.2.2. It is to my mind clear beyond doubt that "creditors" in the context in which that word is used means the creditors (both Preferential and Unsecured) who satisfied the requirements of Clause 3.2.2. No other construction makes sense in context.
14. Although some reliance was placed by FSCS on clause 5.2, in my judgment this clause does not assist on the issue that I am now considering. The first sentence is no more than a statement that none of the company's assets are subject to a fixed or floating charge and thus that there are no secured creditors. That this is correct in my view is supported by Paragraph (a) of Appendix IV to the CVA which is in similar terms and is the information required to be provided by Rule 1.3(2) of the Insolvency Rules in any proposal for a CVA. That rule requires that the following will be stated or otherwise dealt with in the proposal namely "(i) the company's assets with an estimate of their respective values, (b) the extent to which the assets are charged in favour of creditors". The word "creditor" used in Clause 5.2 may have a wider meaning than I have attributed to that word in the provisions of the CVA I have considered in paragraphs 11 and 12 above but that does not matter for present purposes given the limited effect of the sentence. Context is key to an understanding of the words that have been used and the context in which that word has been used in Clause 5.2 is different to the context in which that word is used in the other provisions to which I have so far referred.
15. For these reasons, I reject the submission that on true construction the CVA applies to contingent creditors whose tort claims have accrued after the 22^nd November 1999. In those circumstances, the suggestion that I should not follow the reasoning of David Richards J in T&N does not arise. Even if it had, I would not have acceded to the submission. His reasoning in support of the conclusions he reaches cannot be described as plainly wrong which is the threshold test before a judge should depart from a decision of a judge of coordinate jurisdiction. The basis on which I am asked to depart from his reasoning is not in my judgment sound. The question which David Richards J was concerned with was the policy that underlay the unamended Rule 13.12 of the Insolvency Rules. In my judgment it is simply not arguable to suggest that following an amendment to a rule it is open to a Judge hearing a case by reference to the unamended rules to conclude that the policy that underlay the unamended rules is to be decided by the policy that underlay a subsequent amendment that did not apply at the time relevant to the issue under consideration. In my Judgment David Richards J was plainly correct in the conclusions that he reached and it would plainly be wrong for me to depart from that reasoning by reference to the submission now under consideration.

JAS Discretion and Court Direction

16. The next point argued on behalf of FSCS is that even if on true construction the CVA is to be construed as contended for by JAS, nonetheless the Court can direct the JAS to distribute the assets held by them either as Supervisors or as Administrators to a wider class of creditors than the CVA creditors and thus to those with contingent tort claims as and when they accrue. In support of this proposition, FSCS relies on Regulation 9.1 within Appendix III to the CVA which it is submitted give the JAS a wide ranging discretion to depart from the strict terms of the CVA in unrestricted circumstances. I turn first to Regulation 9.1 in order to test whether it has the wide ranging effect which is contended for.
17. The words upon which most reliance is placed by FSCS are those in the final clause, because - if read in isolation - they appear to permit the JAS to take any action which differs from the course of action anticipated in the Proposal. In my judgment this is an impossible approach. The clause has to be read as a whole. Read as whole, the primary obligation imposed by Clause 9.1 is an obligation to "... do all [things] necessary to give effect to the Proposal ...". This of itself makes it unlikely that any qualifying discretion would be as wide-ranging as is suggested since if such was the case there would be no point in imposing the primary obligation to which I have referred. More importantly however, the authority of the JAS to depart from any course of action anticipated in the proposal is expressly qualified by the requirement that such steps were taken "... to protect the best interests of those concerned in the Arrangement ...". Once it is acknowledged that those words qualify the discretion granted by the clause and once it is acknowledged (as in my judgment it must be for the reasons already given) that " ... those concerned in the Arrangement ..." are the Preferential Creditors and Unsecured Creditors as defined and/or who satisfied the criteria set out in Clause 3.2.2 then in my judgment it is readily apparent that clause 9.1 does not have the effect contended for and it certainly would not permit the JAS to make a distribution to those who do not come within the definitions and/or satisfy the criteria to which I have referred.
18. This leads FSCS to submit that the Court has power to authorise such a departure by giving directions to that effect to the JAS. The authority said to support this approach is the judgment of Hoffmann J as he then was in Re FMS Financial Management Services Limited (1989) 5 BCC 191. The difficulty that arose in that case in summary was this -the company had in its possession securities purchased by it or otherwise belonging to its clients. The securities included shares in a worthless company called GSS. Pursuant to directions from the court, the administrators sent to clients who could be identified as entitled to them the share certificates in GSS. This left a number of clients who had purchased such shares but who could not be identified as entitled to specific certificates. It was proposed that the assets and client monies that remained which could not be attributed to particular clients should be divided equally amongst the clients. The difficulty was that those who received GSS certificates were not treated as creditors whereas those who had purchased shares in GSS but who had not received share certificates were with the result that there was a difference of treatment which depended on whether a particular client could be identified as entitled to certificates or not. Hoffman J directed that the GSS shareholders who had received certificates should be admitted to proof as creditors.
19. The juridical basis on which the court was able to make this order appears to have been assumed, no consideration appears to have been given to the status of the funds and assets under consideration and there was no argument at all to the effect that the assets were held on trust for the creditors and thus that it was not open to the court to authorise what in effect would be a breach of trust. The only reasoning within the judgment that supports the decision appears at paragraph 193C and is to the following effect: " / think the only answer is for me to direct the administrators that so far as possible they are to admit the GSS shareholders to proof as creditors on the same terms and for the same amounts as the client creditors ..." [Emphasis supplied]. It is perhaps worth noting that the only appearance at the hearing before Hoffmann J was on behalf of the administrators, that the judgment was delivered ex tempore and no authorities or any provisions of either the IA or the Insolvency Rules were referred to nor are any of the terms applicable to the scheme under consideration set out. I return to this judgment once I have considered the later authorities relied on by the parties.
20. In Re Alpa Lighting Limited [1997] BPIR 341, Evans-Lombe J and the Court of Appeal held that the court had no jurisdiction to vary the terms of a CVA by altering a completion date and that a power vested in the Court to give directions did not include a power to amend an Arrangement. It is submitted on behalf of the JAS that the effect of this decision is clear and the position adopted by FSCS amounts to an attempt to persuade the court to authorise a variation to the terms of the CVA. FSCS relies on the terms of this judgment because neither Evans-Lombe J nor the Court of Appeal declined to follow or disapproved Re FMS Financial Management Services Limited. Whilst it is true to say that the Court of Appeal did not expressly disapprove the decision, in my judgment the standing of Re FMS as an authority is seriously circumscribed. In a strong statement of principle Nourse LJ said:

"The only power conferred on the court pursuant to Section 7(4)(a) is to give directions in relation to any particular matter arising under the voluntary arrangement. That wording presupposes the continuation of the voluntary arrangement in the form which it is. Moreover and more significantly I have never heard it suggested, and no authority has been cited for the suggestion, that a power to give directions under an instrument ... includes a power to amend it. The two things are entirely different."

In relation to Re FMS that case was distinguished on its facts. Nourse LJ said:

"The decision in Re FMS ...is distinguishable on the simple ground that whatever the effect of the Judge's decision may have been, no amendment to the CVA was sought in that case. The Judge did not refer to any such amendment and he was not invited to make one. Whether or not the effect of the admission of a third class of creditors can fairly be described as Ms Johnson has described it, it is a question into which it is unnecessary to go"

Ms Johnson had said that the effect of the admission of the third class of creditors was that the first and second classes would recover less than would otherwise have been the case and that necessarily involved an amendment of the CVA - see 346F.

21. In light of this analysis it is difficult to see what standing the decision in Re FMS has. The Court of Appeal did not follow it in Alpa and I cannot think that a distinction between a direction which has the effect of varying the terms of a CVA and a direction that its terms be varied is one that is likely to be productive of clarity or certainty in an area of the law where certainty is of great importance. In my judgment Re FMS is to be regarded as a case confined to its own facts (something which in my judgment is highlighted by that part of the judgment I have emphasised in the quotation from Hoffmann J's judgment referred to in Paragraph 19 above) and since the judgment does not set out the basis for the decision reached it is one of very uncertain value as a basis for proceeding in other cases. None of the points of principle identified by Nourse LJ appear to have been argued or even drawn to the attention of the judge in Re FMS. In my view it does not provide a sound foundation for the submissions made by FSCS. The correct approach is that identified by Nourse LJ - the court does not have the power to direct a variation to the terms of a CVA nor does it have jurisdiction to direct a course of action that would involve a breach of the terms of the CVA other than to the extent that the terms of the CVA confer a power on supervisors to depart from the strict terms of the CVA.
22. Even if this general point is wrong, in my judgment there is a narrower reason why in the circumstances of this case a direction to the effect sought by FSCS is one that the Court does not have power to make. It has been clear since the Court of Appeal decided Re NT Gallagher & Son Limited [2002] EWCA Civ 404, [2002] 1 WLR 2380 that where (as here) a company (or individual) voluntary arrangement provides for monies to be held for the benefit of the CVA creditors, that created a trust of those monies for those creditors and (subject to any express powers conferred by the CVA) that trust has to take effect

according to its terms. In this case that analysis is emphasised by Regulation 12.1 of the CVA, which expressly provides that all the Arrangement Funds, being the funds referred to in clause 3.2 (" ... the sums of money currently held by the joint administrators ... plus the net proceeds from future realisations) are received and held by the joint supervisors on trust to employ such funds "... only for the purpose of the Arrangement". Whilst it is true to say that Harman J had reached a similar conclusion in Re Leisure Study Group Limited [1994] 2 BCLC 65, neither of those cases had been decided on 2^nd December 1988 when Hoffmann J decided Re FMS. There is no power to which my attention has been drawn that would enable a court considering an application for directions to authorise the supervisor of a CVA to breach such a trust. It follows in my judgment that Re FMS cannot be regarded as authority for the proposition that a court can direct the supervisor of a CVA to proceed in a manner that has the effect of varying the terms of a CVA (as opposed to a direction that its terms be varied which, following Re Alpa, is a direction that cannot be made in any event) in a way that involves a breach of trust. That is so because such a direction is simply not possible which was the limitation on the court's powers that Hoffmann J acknowledged in Re FMS. In this regard I agree with what Mr David Donaldson QC sitting as a Judge of the High Court is reported as saying in Re TBL Realisations Plc [2004] BCC 81 at 89 where, having drawn attention to the fact that the judgment in Re FMS was short on detail as to the terms of the CVA and the status of the assets at the time of the order, he added that"... it seems to me most improbable that Hoffmann J could have been asserting a power in the court to direct a distribution in breach of trust and I am not prepared to accept that the FMS case is authority for such an unlikely proposition.". It is noteworthy that Pumfrey J in a later application in the same case rejected in terms the suggestion that Re FMS was authority for the contention that" ... where for any reason a creditor or group of creditors has or have been excluded from and therefore are not bound by a CVA the appropriate course is for the court to direct the administrator to treat such creditors on equal terms and pari passu with the CVA creditors" - see the judgment of Chadwick LJ in paragraph 17 of his judgment in the same case at [2004] BCC 103. This is in essence precisely the submission made on behalf of FSCS in this case and is one which in my judgment lacks any foundation for the reasons that I have given. Whilst Chadwick LJ referred to Re FMS in passing in the course of his judgment in Re TBL Realisations Plc, he did not comment on its effect and certainly did not follow approve or apply it. Arden LJ did not mention the case at all.

23. In those circumstances and for those reasons, I reject FSCS's case that this court can direct the JAS to distribute the assets held by them either as Supervisors or as Administrators to a wider class of creditors than the CVA creditors and thus to those with contingent tort claims as and when they accrue after the relevant date.

The Administration Funds

24. As I have mentioned already, the sum of £1,954,494.30 odd stands to the credit of the administration account (the administration funds) and has not yet been transferred to the CVA accounts. Ms John submits that the JAS as administrators can be directed to preserve some or all of the administration funds for distribution to the category of contingent creditors with which this application is concerned. JAS submit that this fund is as much held on trust for the CVA creditors as is the funds held in the CVA account.
25. As to this point in my judgment the starting point is that identified by Chadwick LJ in Re TBL at paragraph 22 of his judgment where he said this:

"The starting point ... is to recognise that the company and the joint administrators are contractually bound by the terms of the voluntary arrangement. The true analysis is, perhaps, obscured by the fact that the joint administrators are also the joint supervisors of the arrangement; but it is necessary to keep in mind that they act, as administrators on the one hand and supervisors on the other hand, in separate capacities. The administrators have power, under Section 14(1) of the 1986 Act and Para. 18 of schedule 1 to that Act, to make any arrangement or compromise on behalf of the company. It was in the exercise of that power that the administrators entered into a compromise with the CVA creditors in the terms contained in the proposals approved on January 25^th 2001."

The position is exactly the same in this case. Thus it is critical to examine the terms of the CVA in order to ascertain whether the JAS are, or FSCS is, correct in the submissions they make on this issue. I say this because as Chadwick LJ observed at paragraph 24 of his judgment in Re TBL:

"... it could well be said, on one view at least, that the effect of the agreement by the company, acting by the administrators, that all its assets shall be realised by the administrators and (subject to the specified exceptions) paid by the administrators to the supervisors for the purposes of the voluntary arrangement is that, subject to control by the court in the administration, the company's assets are subject to a trust to give effect to the terms of the voluntary arrangement."

26. Against that background I turn to the terms of the CVA in this case. Clause 3.2 provides that the assets to be comprised in the CVA are those sums currently held by the administrators "... plus the net proceeds from any further realisations". Clause 4.1 contemplates that"... all funds from the administration ..."will be distributed pursuant to the CVA. Clause 5.2 provides that all unrealised assets are excluded from the CVA but the administrators are under an obligation to realise the unrealised assets. Clause 8.1 provides that the arrangement was to continue until such time as all funds from the administration have been distributed. Clause (a) within Appendix IV provides that the Company's assets are excluded from the arrangement but are to be realised by the JAS as administrators "... for the benefit of the Arrangement" and Clause (b) provides that the Arrangement Funds - which are defined by reference to Clause 3.2 and are "... the sums of money currently held by the joint administrators ... plus the net proceeds from future realisations ..."-will be provided by the Joint Administrators.
27. In my judgment the true effect of these provisions - and in particular clauses 3.2.1, 3.2.3, 4.1, 5.2, Regulation 12.1 and Paragraphs (a) and (b) within Appendix IV when read together - is clear: once realisation has taken place (as must be the case in relation to the administration funds because those funds are cash) they are impressed with a trust by which the JAS as administrators hold the sums realised on trust either for the purposes of the CVA or for themselves as joint supervisors whereupon they become impressed with the trust expressly identified in Regulation 12.1. That being so, I do not see how the court can by direction given to the JAS as administrators require them to breach that trust. It was submitted by Ms John that this was precisely what Chadwick LJ contemplated by the use of the phrase "subject to control by the court in the administration" I do not agree that this is what was meant. It is not open to the court to authorise an administrator to breach a trust any more than it is open to a court to authorise a breach of trust by the supervisor of a CVA. As I said in the course of the argument, I think that what Chadwick LJ meant was control in the sense that the Court has power to give directions concerning realisations for example if realisation is not cost effective, or would take too long or as to the method of realisation where there was or could reasonably be anticipated to be a dispute about that or as to the incidence of the costs that could be deducted from the sums realised as a result of the realisation process. These sort of issues are the every day issues of administration and of applications for directions and in my view are what Chadwick LJ had in mind.
28. In those circumstances, I reject the submissions made by FSCS concerning the administration funds.

FSCS's Application.

29. FSCS's application under IA Section 6 was issued on 27 May 2008. It was accepted by Ms John that the time limits for the making of such an application imposed by IA Section 6 had expired in June 2007. In those circumstances it was submitted on behalf of the JAS that the claim was issued at a time when it was barred by primary legislation and should therefore be struck out or dismissed on that ground alone since there was no power in the court to extend the time in which an application under IA section 6 can be brought. In support of this submission, the JAS relied on the decision of Lloyd J as he then was in Re Bournemouth & Boscombe Athletic FC Co. Ltd [1998] BPIR 183 where a submission that the court had power by reason of Rule 7.51 of the insolvency Rules 1986 and RSC Order 3 Rule 5 to extend time was rejected. As Lloyd J said: "Section 6(3) is a limitation period ... and is not something which of its nature can be the subject of an order under Ord.3 r.5".Somewhat surprisingly, Ms John did not seek to argue the issue afresh before me by reference to the provisions of what are now the Civil Procedure Rules but rather sought as she put it to preserve the point to argue it before the Court of Appeal if necessary. This was surprising, if she had any confidence in the point, because technically Lloyd J's judgment is not binding on me and related to the RSC not the CPR. I have therefore considered the point afresh. IR Rule 7.51 has now been amended so that it refers to the CPR rather than the RSC and CCR as it did previously. I am entirely satisfied that Lloyd J's reasoning was plainly right and applies with equal force to the position under the CPR. The equivalent provision within the CPR is CPR 3.2(a). It confers a power to extend time for compliance with any "... rule practice direction or court order ..." It does not confer a power to depart from a time limit imposed by primary legislation any more than did RSC Ord.3 r.5. I conclude therefore that FSCS's application was brought outside the time limits imposed by IA Section 6(3) and that there is no power in the court to extend the time within which such an application can be brought. I conclude therefore that the application ought to be dismissed.
30. Had it been necessary to consider the application on its merits, I would probably not have been prepared to make any of the orders contemplated by IA section 6(4) in the circumstances of this case. The unfairness was alleged to be apparent on the face of the CVA and to arise from the fact that contingent tort creditors were excluded. This was contested by JAS and although none of these points were argued before me in any depth by either party, it seems to me difficult to characterise as unfair the arrangements that were made which derive from the very policy considerations identified by David Richards J in T&N. The more fundamental point however concerns the limited range of remedies that are available - the primary remedy that Ms John relied on was that referred to in IA Section 6(4)(b). However, as Mr Maynard-Connor pointed out, the prospects of revised proposals being approved by all creditors is non-existent. This caused Ms John then to rely on the power to revoke contained in IA Section 6(4)(a). Such an Order would at least potentially have very serious ramifications. Very substantial interim dividends have been paid out to a substantial number of creditors. Revocation is likely to involve attempts to re-collect those sums. The degree to which if at all this could be done is very far from clear. It would involve an enormous amount of work and, therefore, cost. Whether to grant relief is a question of discretion. For these reasons I would have been inclined to refuse relief. However, given my conclusions on the time limit point, I express no concluded view either on the question of whether unfair prejudice has been made out or whether it would have been right to grant relief in the terms of either IA Section 6(4)(a) or (b) had such prejudice been made out.

Disposal

31. For the reasons set out above, I will give directions broadly in the terms set out in paragraph 40 of Mr Dawson's second witness statement subject to the terms of the order making clear that the directions apply exclusively to creditors who have only tortious claims that have accrued since the passing of the relevant date. Different considerations may apply to such creditors with contractual as well as tortious claims and the parties have indicated that there is likely to have to be a further application to resolve those issues. I will as requested by the parties reserve all future applications in this administration to myself until further order. Mr Maynard-Connor indicated that his clients were not seeking costs from FSCS and therefore I will make no order as to costs against it.
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