England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		4 December 2013

The Hon. Mr Justice Hildyard :

1. The question I now have to consider arises in the context of a scheme of arrangement (which I shall call "the Scheme") proposed by the Co-operative Bank Plc, which I shall describe as "the Bank", pursuant to section 896 of the Companies Act 2006 and relating to seven series of subordinated debt securities which I shall describe as the "Dated Notes".
2. The Dated Notes represent an aggregate principal amount outstanding of some £937 million. Though it relates solely to the Dated Notes, the Scheme is part of a more general exercise, the aim of which is to recapitalise the Bank in the wake of the significant financial pressures which it is currently facing as a consequence of business losses and changing and more stringent regulatory requirements.
3. The more general exercise has been referred to before me, and I think has been generally referred to as a matter of course, as the "Liability Management Exercise". The aim of that is to raise capital for the Bank of some £1.2 billion. Such are the financial pressures on the Bank and its pressing need for capital that if the Liability Management Exercise is not implemented by the end of this year, now very fast approaching, it is likely that the Bank will be subject to a special resolution procedure pursuant to the terms of the Banking Act 2009. The Scheme has thus been put forward in circumstances of considerable urgency. If the Bank goes into what came to be referred to before me as "Resolution", the creditors and shareholders of the Bank to whom the Scheme is proposed are unlikely to receive any substantial return.
4. On 18 November 2013, I made directions at the first hearing of the Scheme for a single meeting of all Scheme Creditors, comprising all seven series of Dated Notes for the purpose of considering or approving the Scheme as then proposed. The Scheme as then proposed was the product of considerable negotiation since July or so, between the Bank and the dated noteholders; and more particularly, perhaps, between the Bank and a group of dated loan noteholders to whom I shall refer as the "LT2 Group".
5. When the matter was before me on 18 November, I was concerned only with the question of whether a single meeting of the seven series of dated noteholders would suffice and, if so, what directions should be given for that meeting, its convention, notification and procedure. The hearing on 18 November was, in other words, the Re Hawk meeting, dealing with matters identified as appropriate to be dealt with, in the context of a scheme of this kind, by the case in the Court of Appeal of that name.
6. For the reasons I sought to set out in an ex tempore judgment at the end of that hearing, I was persuaded that a single meeting of Scheme Creditors would suffice, given especially the common plight of all seven series faced with the alternative of Resolution. Since 18 November, however, what is described by the proponents of the modification to the Scheme as a serious "glitch" in the Scheme as originally proposed has emerged or become apparent. The glitch adversely affects owners of large holdings of Dated Notes, though it correspondingly may benefit holders of small numbers of Dated Notes, for the reasons I shall describe.
7. A group of dated noteholders, many of whom (but not all of whom) form part of the LT2 Group who principally negotiated the Scheme with the Bank, and who together represented an aggregate of 55% by value of the Dated Notes, have requested the Bank to agree to a modification of the Scheme. As I understand it, the percentage presently locked up is some 66%. The modification now proposed is also supported by Invesco Perpetual (which I shall refer to as "Invesco") as the agent and investment manager of several funds and the beneficial owners of a significant but not specified amount of Dated Notes. Invesco had noticed and communicated to the Bank, I think on 27 November, its concern about the glitch that has emerged. Invesco is not a member of the LT2 Group and was not involved in the negotiation of the Scheme.
8. The Bank itself, as the proponent of the Scheme, has considered the request for its modification and acceded to it, subject of course to the approval of the court, since all are agreed that the modification proposed constitutes one of greater substance than could be made under the provisions for amendment already contained in schemes of this kind, and indeed provided for by this Scheme.
9. However, a number of holders of smaller amounts of Dated Notes have objected to the modification. These objectors consider that there was no glitch as such, but simply that this was one of the features of the Scheme on which they are entitled to rely. The objectors that I have heard argument from, and who have appeared before me, seem likely to be representative of a number of smaller holders, either presently holding small holdings or who, by a process of splitting, may in the future hold smaller holdings. I shall return to the competing arguments later, after first explaining in broad terms the nature of what has been described as a glitch and the proposed modification to remove or attenuate it.
10. The glitch is explained in more detail in the second witness statement of Mr Niall Booker, the Chief Executive Officer of the Bank. He explains both the problem and the solution in paragraphs 14 to 27. Subject to any comments to the contrary, I would propose simply to attach a copy of those paragraphs to this judgment. However, for present purposes, I can take a summary of the source of the glitch and the solution proposed from the skeleton argument of Mr Zacaroli QC, counsel for the Bank. His starting point is a brief comparison of the Scheme as originally proposed and as suggested to be modified.
11. The Scheme as originally proposed provides that the Dated Notes would be cancelled in exchange for the restructuring consideration consisting of, first, £100 million of the 11% Bank T2 Notes; and secondly, 112,500,000 new ordinary shares in the Bank, representing 45% of the new equity in the Bank; and thirdly, the opportunity to participate in a £125 million cash subscription offer in respect of a further 62,500,000 additional new ordinary shares, representing 25% of the new equity in the Bank, through the open offer at a price of £2 per share. It is the terms of this open offer which have given rise to the problem in this case.
12. The proposed modifications intended to address those problems would alter the restructuring consideration in the following respects:

(1) First, the number of new ordinary shares to be issued, as part of the exchange for the Dated Notes, would be increased to 141,666,666.

(2) The number of additional new ordinary shares to be issued, pursuant to the open offer, would be reduced to 33,333,334, amounting to 13.33% of the fully diluted share capital and the subscription price in respect of those additional subscribed-for shares raised to £3.75 per share. The effect of the modifications will be broadly to reduce both the amount of the equity to be offered in an open offer and the notional price per share in respect of the shares being offered in exchange for Dated Notes; and to increase the price per share in respect of the shares offered as part of the open offer, thus closing the gap between the notional value of the new ordinary shares and the additional new ordinary shares.

13. By way of further explanation, I would add to that summary in the skeleton argument the point which may be implicit or obvious, which is that it is a discounted value of the shares available for subscription in the open offer which has made them so attractive to potential investors holding Dated Notes. In essence, the reason for the request for modification is that there has been, and is likely to continue to be, a significant number of subscriptions for the minimum allocation by holders of small numbers of Dated Notes. I should explain that the minimum allocation requirement was introduced into the Scheme, as originally proposed, in order to ensure that the requirement for an equity prospectus would not have to be fulfilled. That was necessary in order to achieve the timetable, which is a very hurried one, as I have explained.
14. The consequence of what has been described as a glitch is that the proportion of shares available, pursuant to the open offer for owners of larger holdings of Dated Notes, may become significantly less than their proportionate holding of Dated Notes. The reason for this is summarised in the skeleton argument of counsel for the Bank as follows:

(1) First, a necessary feature of the Scheme, as I shall foreshadow, is the scaling back mechanism in the event of an over-subscription for the additional new ordinary shares. The mechanism chosen was to scale back in proportion to the existing holding of Dated Notes by those choosing to subscribe for additional new ordinary shares.

(2) In addition, a necessary aspect of the open offer is, as I have said, the minimum allocation requirement of 50,000 additional new ordinary shares.

(3) The existence of the minimum allocation requirement necessarily derogated from the proportionate scaling back method chosen, to the extent that a holder of a very small number of Dated Notes was entitled, if they subscribed for additional new ordinary shares at all, to subscribe for 50,000 shares. Moreover, the open offer placed a limit of 1,250 on the number of Scheme Creditors who could subscribe for the additional new ordinary shares before they were all taken up.

(4) In practice, the combination of the significant discount at which the additional new ordinary shares were offered and the minimum allocation requirement has had the effect of encouraging either the splitting of holdings of Dated Notes by Scheme Creditors or the acquisition of small parcels of Dated Notes, so as to facilitate participation in the open offer at the minimum allocation level. Put shortly, a small holding of Dated Notes is a gateway to a discounted subscription price.

(5) The more investors that subscribe for the minimum allocation, the greater is the diversion from a broadly pro rata distribution of additional new ordinary shares, which the Bank has emphasised (and which I accept) was a guiding principle in fashioning the Scheme. Owners of large holdings of Dated Notes, including many of the LT2 Group, but also others, have become concerned that this impacts so adversely on them in prejudicing their ability to achieve a pro rata distribution of their overall Scheme consideration, that they have felt it appropriate, even in these difficult circumstances which are thereby exacerbated, to seek a modification of the Scheme.

15. The effect and seriousness of the glitch has been magnified by the basic fact that although it was not apparently spotted by its proponents, the effect of the minimum subscription provision and the potential for using a relatively small holding, be it an acquired or a retained Dated Note, to acquire a disproportionate number of shares at a discount, was swiftly identified in the market, as the Invesco letter to the Bank of 27 November 2013 confirms. There seems little, if any, doubt that this has provided an incentive for larger holders to split their holdings or to acquire a large number of small holdings, with the effect that it is creating a rush to fill the 1,250 places. The more these places are filled with creditors who have, for example, £1,000 worth of Dated Notes, the more difficult it is, as I have explained, to achieve a pro rata distribution.
16. The best example of that which was provided to me is the account holder letters (the documents, I should explain, by which subscriptions are effected) from 125 creditors, each of whom are said to be segregated portfolios of a Cayman segregated portfolio company, and each of whom has £1,000 worth of Dated Notes and each of whom is subscribing for the minimum allocation of 50,000 shares under the open offer. That is merely an arresting example. I can expect it to be replicated. Indeed, I am told that the experience to date is that most of the account holder letters that have been received so far are for the minimum allocation, though the profile of holdings before the Scheme was announced demonstrated few, if any, such small holdings. Indeed, some 39 holders, I am told, held between them some 48% of the Dated Notes.
17. Mr Zacaroli gave an arresting illustration of the effect, in the case of a subscriber for shares in the open offer, in right of a small holding of £1,000 worth of Dated Notes. On a pro rata basis, he told me, under the open offer, £1,000 worth of Dated Notes would translate into an entitlement of 66 shares. That is because £1,000 represents approximately 0.0001% of the total Scheme claims. As a result of the prospectus directive exemption and the need for a minimum threshold of 50,000 shares, a dated noteholder with £1,000 worth of Dated Notes will receive 49,934 shares more than would have been their pro rata entitlement. That is a factor of 750 times more than their entitlement. Put that into numbers: for a £1,000 investment, plus an outlay of a further £100,000 to invest in an open offer, which is the option they are given by having the £1,000 worth of Dated Notes, the creditor stands to make an immediate gain, if the implied discount turns out to be accurate, of about £120,000. The propensity for a dramatic departure from the original intention of achieving pro rata distribution, so far as consistent with a minimum allocation, is obvious.
18. Mr Zacaroli went on from there to explain both the proposed solution and the Bank's reasons for supporting it. An explanation is plainly necessary. As I indicated in my first judgment on the Scheme on 18 November, the Bank already has the advantage that some 55% or more of the holders are irrevocably committed by agreement or undertaking to support the original Scheme. That makes it likely, though not I suppose certain, that the Scheme would be approved, even with a glitch in it. Of course there may be arguments, both of law and practical reality. It may be that an argument might be run by people who are irrevocably committed, one way or the other, to the effect that the emergence of the glitch and its exploitation is a fundamental circumstance such as to release them from their tie-in. That seems to me to be a difficult argument, but it is the sort of argument which might be run and which may destabilise the process.
19. In terms of practical reality, although the percentage of committed people is high, nevertheless there is always the hypothetical possibility that for one reason or another the necessary statutory majorities would not be achieved. Given the commitments, on one view, the Bank has no real dog in the fight. Its concern at one level is simply to get the capital in, and it has no real interest in who may ultimately be its shareholders at the end of the day.
20. Having said that, Mr Zacaroli advanced five reasons for the Board of the Bank having decided to support the modification. He described these as follows:

(1) First, he said that the modified Scheme is, in the considered view of the Board, better reflective of what commercially has always been intended, namely as near to pro rata allocation as possible, which I have said was a guiding principle.

(2) Second, the Bank and the LT2 Group simply did not anticipate that there would be so many holders or small holders of Dated Notes that would seek to structure their affairs in such a way as to exploit the existing structure, either to buy £1,000 of Dated Notes or to split their existing holdings in order to provide the cheapest possible ticket to the discounted offer.

(3) Third, a greater proportion of dated noteholders, some 66%, have now agreed to lock up for the modified Scheme, whereas only 55% have agreed to lock up for the existing Scheme. This provides the Board with some greater measure of comfort that the new Scheme has a better chance of being approved. The Board recognises, Mr Zacaroli assured me, that in some degree at least, voting against the Scheme, even with a glitch in it, would be like turkeys voting for Christmas. In a sense, to vote against either Scheme would invite the prospect of Resolution. But comfort is comfort, and 66% is a greater comfort than 55%.

(4) Fourth, the Board are concerned that there must be, so far as possible, an orderly and certain process surrounding the meetings and the sanction hearing for the Scheme, in order that delays should not translate into missing the end of year target. There is a concern, so I am informed, that with the number of vote splittings and other efforts to seek to take advantage of this glitch, if the existing Scheme stays in effect, it may cause disruption to the orderly process of the Scheme and the meetings necessary for its sanction.

(5) The fifth point is this: the Board of the Bank is keen to ensure that, going forward, it has a stable and supportive investment base and that in circumstances where 66% of those of its creditors who will become majority shareholders are in favour of this modified Scheme, it is anxious to ensure that they are not dissipated from the word go.

21. I shall come back to these reasons, since those objecting to the modifications do not accept them. But I think I should say that I do not think that, in the end, it is for me to gainsay the conclusions of the Board in this regard, unless I consider the reasons put forward as fanciful, incredible or otherwise not such as to support in any way the decision that they have made. I myself have some doubts as to the power of some of the points. But at the end of the day, the first point does seem to me to carry conviction.
22. Of course, the question as to the reasons for the Board deciding that if it is possible, it would wish to promote the modified Scheme and not the Scheme as originally proposed, is very different from the question which ultimately seems to me to be the question with which I am presently confronted. That question is whether there is some legal or equitable reason precluding the Bank, and for that matter those who have given irrevocable undertakings or agreements, and who were the architects of the original Scheme, from now changing horses. I turn, therefore, to consider the opposition to the modifications proposed.
23. In this regard, I was taken by Mr Zacaroli to email objections from a number of small holders of Dated Notes. I went through those. They were exhibited at Bundle 10 on pages 680 through to 688. I also heard, in the course of what I should have explained earlier was two hearings, one at 9.30 a.m. and the other at 4.30 p.m. yesterday, from four objectors in person: namely Mr Pocock, Mr Tanner, Mr Horsley and Mr Swimer. In the time available, none of these objectors had instructed solicitors or counsel. I must admit to having had some concerns in this regard, since if a point is of substance, in the ordinary course those seeking to advance it should have the opportunity of seeking proper professional representation.
24. These concerns were contributed to by receipt of an email last night from another objector, Mr Huggins, who was in court at the time, but did not wish to say anything, but whose email conveyed his very strong objection to the fact that the modification has been rushed through far too fast. Nevertheless, I did not understand any of the objectors to wish to seek an adjournment for the purposes of being represented by counsel at a subsequent hearing. All of the objectors, as I understood it, very properly recognised that delay would be fatal to the proposals and that the alternative of Resolution was disastrous. Although it is an uncomfortable position, in the end, I consider that I should proceed upon the basis of their own presentation to me and I rely on the fact that none had formally asked for an adjournment.
25. In the event, if I may say so, all of the objectors who spoke acquitted themselves in difficult circumstances with what I would describe as persuasive moderation; and although they very sensibly declined to take part in what became quite an abstruse legal debate, they nevertheless put forward their own personal considerations with economy and conviction. I hope I do not in any way underplay the strength and cogency of their several presentations if I describe their common theme and gist as being to the following fourfold effect.

(1) First, that they had acted to their detriment in so arranging their affairs, either by selling most of their Dated Notes and retaining only sufficient to qualify for the open offer (as in the case of Mr Tanner) or borrowing to take advantage of the discounted subscription price (as in the case of Mr Pocock and, I think, Mr Horsley and possibly Mr Swimer). In short, they would be, and should not be, prejudiced, having relied on the Scheme as promoted and advertised.

(2) Secondly, they maintained that it is far too late fairly to alter the terms of the Scheme. It had been months in its preparation and had been presented as the only game in town to provide a solution. The court should not enable significant changes to the rules at such a stage, and indeed it should not lend its hand to a fundamental change in the position of the goalposts.

(3) Third, where its prejudice to them was clear and the consequences of what had been proposed, on which they were entitled to rely, any prejudice to the LT2 Group was their own fault. It was they who had fashioned and dictated to the Bank the Scheme as they had wanted it, using their strong bargaining position to do so. They should live with the consequences, albeit unforeseen.

(4) Fourth, the Bank had advanced no real and compelling reason for agreeing to the modification. The glitch was simply the consequence which was envisaged in principle, even if underestimated in practice, and accepted on the basis that the Bank was agnostic as to the source of the capital, so long as the capital was raised. The Bank, they said, was once more being dictated to by the larger battalions; in particular, the LT2 Group, at the expense of its loyal smaller bondholders.

26. Mr Pocock, who spoke cogently at the first part of the hearing in the morning, but who unfortunately could not attend later in the evening, added to these points some more particular points relating to his own personal position; the question of notification and the suggested application of section 178 of FSMA. In terms of notification, his complaint was that the Bank had not complied with the obligations, as laid out in the explanatory statement which had been circulated as part of the putting forward of the Scheme, to inform dated noteholders of the application to vary an order made conveniently to the creditors under section 896 of the Companies Act 2006. He repeated the other arguments that I have identified, but he added to this the suggestion that the modification had been put together by the use of confidential information and in circumstances which amounted to what he described as insider trading. I shall return to these later.
27. Before turning to address the fourfold objections which I have described, I should first make some preliminary points which I consider important and relevant overall.
28. The first, logically, is to explain why I felt it necessary to delve into these complicated matters now. It was urged on me, certainly in the morning, by Mr Zacaroli (whose submissions in this regard were, as I understood it, supported by counsel both for the LT2 Group and the others who had joined their camp for the purposes of supporting the modification, and by Law Debenture whose role I have previously described in my earlier judgment) that the appropriate course was to recognise that this was merely a continuation of the Re Hawk hearing, at which the only question properly before the court was the question of the constitution of the relevant classes. The court should not become engaged in other matters, whether they be of fairness or other considerations relevant to the question of whether sanction should or should not be given. That was obviously a very beguiling invitation, given the difficulties which have otherwise to be confronted in difficult circumstances. However, whilst accepting entirely that my function on the previous occasion, and to some extent now, is a limited one, nevertheless in the special circumstances of the case, I do not think there is any alternative but to deal with the matter head-on.
29. The reason is really twofold; the reasons being two sides of the same coin:

(1) The first is that, given the timetable and the need to achieve clarity on the matter before the end of the year, this is probably the last occasion on which the decision as to which Scheme should be put before the meeting can be made. That seems to me, of itself, to justify my having to deal with it.

(2) The second is that it is, I think, important to decide the issue, in order to restore some clarity to what otherwise is becoming a most uncertain process. In short, it is really not a matter of fairness which can be properly left to the next hearing. It is a matter of deciding which Scheme, and that the only Scheme, should go forward at the present time.

30. The second preliminary point that I should raise is briefly to explain why I have framed the question as I have, as being whether there is some legal or equitable impediment to the Bank agreeing to modify the Scheme and put only the modified Scheme forward for approval. In a nutshell, this is for the following related reasons.

(1) First, the agreement of the Bank to the compromise or arrangement, which the Scheme in either form represents, is essential. That is settled law in the context of creditor schemes, as is demonstrated by Re Savoy Hotel Ltd [1981] Ch 351 and the years of litigation which arose in that context. This position may be different in the context of shareholder schemes. There is a decision of the Supreme Court of Bermuda in a case called Validus Holdings Ltd v IPC Holdings Ltd & ors, in which it was considered that the position may not be so clear in the context of a shareholder scheme. That is not the position or the circumstance here.

(2) Second, the Bank is at liberty not to proceed with the Scheme at all. The Scheme proposed is simply a proposition. It does not commit the proponent of the Scheme to continue with it. Indeed, I exampled a scheme which had been abandoned, even after the court had given an indication of its likely approval.

(3) Third, and following on from that, unless and until sanctioned by the court, the arrangements which a scheme could co-ordinate have no legal effect at all. Of course, it has been made clear that the propounding of a scheme has many stages, and there is no single stage which represents the presenting of a scheme. But it is quite clear from the case of Kempe Ambassador Insurance Co [1998] 1 BCLC 234 that unless and until sanctioned, a scheme is, as it were, writ in water, and has no legal effect.

(4) Fourth, it follows from all this that the Bank would ordinarily, at least, be fully entitled to withdraw and present a new scheme, subject to questions of timing and the overall discretion of the court. So the question is whether there are factors out of the ordinary, which legally or equitably prevent the Bank from either withdrawing or proceeding only with a modified Scheme.

31. It was to explore that question more fully that I adjourned yesterday's hearing in the morning until the afternoon, to enable objectors and the assembled ranks of leading counsel who spoke in favour of the modification to undertake further research. I have, therefore, as indicated previously, had the benefit of that further research and I have undertaken, so far as I have been able, research myself with the particular objective of seeing whether any of the objections put to me could be translated into legal or equitable impediment, having regard to the fact which I have previously indicated was a source of concern to me, that the individual objectors did not have the benefit of legal representation. A legal or equitable impediment would have to be rooted in principle. It is therefore necessary to consider whether any branch of the law would be relevantly engaged, whether the law of contract, tort, equity or some statutory provision.
32. Dealing first with the question of any tortious liability: I was treated to fairly comprehensive submissions in this regard, especially on behalf of the LT2 Group by Mr Mark Phillips QC. He identified for me the elements which are necessary, in order to establish tortious liability. He properly indicated that although, of course, the tort of deceit was theoretically a basis of tortious liability, there was no question of anything resembling that here. The question, therefore, revolved around whether it could be said that the Bank owed duties in tort, and thus duties of care, to dated noteholders or potential dated noteholders affected by the Scheme and then whether, if there was such a duty, it could be said that the promulgation of a modified Scheme would be in breach of it.
33. I do not think I need to go through the various tests which have caused much anxiety and a great deal of authority, revolving around the genesis and the nature of a tortious duty of care. I refer to Customs and Excise Commissioners v Barclays Bank Plc [2007] 1 AC 181, and the typically luminous judgment of Lord Bingham in that case at page 189 which explains, with admirable economy, the basis of liability. Suffice it to say that I am entirely persuaded that there is, in these circumstances, no basis for imposing a tortious duty of care on the Bank or, for that matter, any of the LT2 Group, such as to raise a legal impediment on that ground to the modification of the Scheme. Whether one regards it in terms of there being no proximity or in terms of whether it is fair, just or reasonable to impose a duty, it does not seem to me that this is an appropriate circumstance in which to advance further the boundaries of tortious liability into a context in which those affected by the Scheme already have the protection of the court under the statutory architecture.
34. I next need to consider whether there is any contractual bar which operates, whether by express provision or inference or implication, and prevents the Bank from withdrawing, in effect, from the Scheme as originally proposed and supporting only the modified Scheme.
35. Again, I can put the matter reasonably shortly; not because the matter is not a complicated one, but because, as it seems to me, the conclusion is clear. In my judgment, there is no contractual bar. Certainly there is none expressed in any of the documents that I have seen. It is true that there are irrevocable undertakings and irrevocable agreements. They operate between the Bank and the relevant dated noteholders, and it is open to either or both to agree to dissolve those commitments. Only if there were some contractual impediment to that, of which I have seen no suggestion, would that be precluded; and even then, there would be the conundrum that the parties to the contract may unanimously agree to dissolve or replace their contractual relationship.
36. Secondly, I have considered whether there might be some inferred or implied contractual promise made to the dated noteholders, or one or more of them, not to withdraw or modify the Scheme. This was urged on me, in effect, if I can put it that way, since it is a translation into legal terms of various factual matters which were addressed to me by objectors: that they had understood that the Scheme, and only the Scheme, being the only game in town, would be the one that would be put forward. They read the document with care. They proceeded on the footing, in the case of the relevant dated noteholders who objected and who may represent other objectors, and they considered that the risk of the Scheme being pulled or modified was effectively excluded by the assertion, in effect, that this was the only alternative to Resolution. They were further reassured by the obvious fact of very high acceptances pursuant to irrevocable agreements or undertakings.
37. These are, of course, powerful reasons why, in any given case, a dated noteholder might determine to take the risk to sell his interest in the notes, or some part of it, and retain only the ticket, as I have described it, to the discounted share subscription. Nevertheless, as it seems to me, although that may demonstrate why such noteholders took the risk, it does not translate into any contractual exclusion of that risk, nor any contractual engagement on the part of the Bank not, if circumstances in its considered view warranted it, to modify the Scheme or withdraw it.
38. I am particularly impressed in that regard also by the point which was made and emphasised with clarity by Mr Zacaroli on behalf of the Bank, by reference to the formal account holder letter. That is a document sent to all creditors and it is a document which, as he said, by definition, those who have already exercised their rights in order to ensure that they are in the first 1,250 to qualify must have seen; and it is, therefore, I accept, a document which is admissible and relevant in considering what the nature of any express or implied undertaking on behalf of the Bank in this case was.
39. Much of the account holder letter is, although interesting, not relevant to rehearse. It deals with the provisions relating to the lock-up arrangements and it details the extent of the obligations either way. It does, however, contain one particular provision in this form, which describes the conditions under which the irrevocable commitments will terminate:

"Termination could occur immediately, upon the occurrence of any of the following defined events…"

And I shall read only (iii) of subparagraph (d) of section 2 of the lock-up arrangement. Termination would occur if

"… the company gives the Noteholder or any other Noteholder written notice of an intention either, (a) not to proceed with the Scheme, or (b) to proceed with the proposed Scheme of arrangement on terms which are different to the Scheme in any material respect."

40. As it seems to me, and as Mr Zacaroli cogently submitted to me, this effectively excludes any implied representation that the Bank had precluded itself from either withdrawing or modifying the Scheme. It is trite that you cannot imply terms which would run contrary to, and fly in the teeth of, the express provisions of a contractual engagement. I do not see that there is any basis, either, of any process of inference if that is a different process in law. Accordingly, it does not seem to me that any contractual impediment to prevent the withdrawal or modification of the Scheme has been demonstrated.
41. Thirdly, and subject to the issue raised by Mr Pocock as to the possible application of section 178 of FSMA, I do not consider that there is any statutory impediment either. I have myself considered whether, by necessary implication or by express provision, the statute precludes, in the circumstances such as are here present, the Bank from withdrawal or modification; and I have to say in summary that I have detected none.
42. That leaves two matters. First, the question of any equitable impediment and second, as to the extent of my own discretionary powers, given that if I were to say that the matter simply occurred too late to be fairly presented and notified and for the court to reach a view on whether to sanction it in time before the witching hour of 31 December, I might simply decline to approve the modification.
43. The question of equitable impediment is an interesting one and it is one which has occasioned some considerable research, both at my invitation on behalf of those propounding the modifications and on my own behalf. I think I can summarise, and perhaps should in the circumstances summarise, my overall view that there is no equitable principle which precludes the withdrawal or modification of this Scheme. In saying that, I suppose I should explain (and I do not mean this at all patronisingly or rudely) that although equity has everything to do with fairness, fairness is not the test of whether an equitable principle is applicable.
44. Of course I understand that in the particular context, there will be dated noteholders who, spotting a feature of the Scheme, as they would describe it, which enabled them to extract some positive and considerable benefit from what is otherwise a difficult situation, should be disappointed if they are precluded from doing so by a revision of the terms which they had understood to be the only game in town. On one view, it may be thought (and I am sure is thought by them) to be unfair that, having been offered this opportunity, they should now be denied it, and particularly so at the instance of the very people who were the architects of the Scheme which conferred that advantage. Nevertheless, as I say, that possible perception of unfairness is not of itself any ground for the intervention of equity. Equity can only intervene on a principled basis, by reference to duties in equity or other equitable doctrines.
45. I have considered whether any principle of fiduciary duty might be invoked, in order to give equitable colour to the submissions that were made to me. However, having considered the matter and the submissions made to me, I do not see that a company, in this case the Bank, owes fiduciary duties to its creditors of a kind which would preclude it from doing the very thing which, in the documentation as I have explained, it put forward as a possibility: that is to say, withdrawal or modification. I also think that there are considerable difficulties in establishing any such duty to creditors in the round. I need not consider that point any further, because it seems to me that the question of fiduciary duty is excluded by the terms of the offer to which I have referred.
46. I accept that there is an equitable duty owed by a debtor to its creditors of complete good faith and transparency. That is evident from the case of Cadbury Schweppes Plc v Somji [2001] 1 WLR 615. That indeed means that the debtors cannot be party to secret side arrangements. However, no such question arises in this case. The Bank, as I see it, has been perfectly plain in terms of an explanation of the glitch which has occurred and the reasons for, and the form of, the solution which it proposes.
47. I have considered also, as I have previously foreshadowed, whether there might be a basis for, in effect, an equitable intervention by reference to the reasons given by the Board for agreeing to this modification. If those reasons were such that they could not possibly comply with the obligations of a director, both under the general law and statute, to act in good faith in the interests of the company (and the company, for present purposes, I shall take to include the interests of creditors as a whole, given the financial circumstances in which the Scheme was propounded) it does not seem to me that the reasons propounded (though I would not, as I have indicated, necessarily attach as much weight to some as to others) demonstrate any improper motive or purpose, nor any departure from the standards which are required. It does not seem to me that I have the evidence or the basis in any other way for second-guessing the considered commercial judgment of the Board as it was relayed to me.
48. It follows, therefore, again translating the admirably concise and down to earth submissions which were made to me by objectors into equitable language, that the remaining question is whether there is some principle of what is called estoppel which might provide some principled basis for precluding modification or withdrawal.
49. Estoppel, simply, is an equitable lawyer's description of circumstances which equity has recognised as preventing or stopping one person from relying on his legal rights or proceeding in a given way, in the light of representations which he has made, or his conduct which has been relied on to the detriment of the representee or the person affected by the conduct. The description of the limits of the various forms or branches (or, as Lord Denning MR described them, "rooms") of the various equitable principles of estoppel have been described to me in a skeleton argument, and I think can be found in the quotation from the judgment of Lord Denning in the subsequent case in the Technology Court, in the case of ADS Aerospace Limited v EMS Global Tracking Limited [2012] EWHC 2310 (TCC), a decision of Mr Justice Akenhead. I do not quote it now, but insofar as is necessary, and it probably would be helpful, the quotation is contained at paragraph 139 and is from Lord Denning's generic description of estoppel in McIlkenny v Chief Constable of the West Midlands [1980], QB 283, at 316 to 317.
50. For present purposes, I need consider only two forms or rooms of estoppel. The first is estoppel by convention; the second is promissory estoppel. I do not think that there is any basis for an estoppel by convention. This is not a case where the parties have proceeded on a shared basis, from which they agreed not to depart or from which (or in the context of which) one or other agreed not to exercise his clear legal rights or attach some particular meaning to some particular engagement or undertaking.
51. Second, I do not think that this is a basis for a promissory estoppel or, as it is sometimes called, equitable forbearance. It does not seem to me that the relevant features of an equitable estoppel have been or could be made out; in particular, as it seems to me, and particularly in light of the contractual reservations to which I have made reference, that a clear and unambiguous representation or promise can be derived. What the dated noteholders have done is entirely understandable, but it is on their calculation of the risks involved, and not based on any unambiguous representation to them, encouraging them to take that risk or to hold them harmless if they did. I refer in this case, in particular, also to a recent decision of the Court of Appeal in Sabrina Soon Duck Park Kim v Chasewood Park Residents Limited [2013], EWCA Civ 239 and the judgment of Lord Justice Patten at paragraph 23, which emphasises the need in this context for an entirely unequivocal representation.
52. In the absence of that, as it seems to me, there is simply no basis for any principled application of the doctrine of promissory estoppel. It looks, at first blush, in lay terms, as if it might be applicable; but in my view, on a considered assessment, it simply is not. Therefore, if the objection is to be made good, it must be on the basis that in the particular circumstances of the case, given the representations made as to the need for certainty and speed, I should, in my discretion, reject the modification. Of course, although it is described in terms of a discretion, it is a judicial discretion which I should not exercise, except on a principled basis. It is not for me to do overall what I might or might not consider to be the fairest thing; it is for me to exercise my discretion according to the well accepted principles on which judicial discretions are to be exercised.
53. It follows from what I have said that there is no legal or equitable reason why I should exercise my discretion one way or the other. It is simply a matter of determining whether it is possible and fair for the Scheme, as modified, to proceed now, with a view to a fair and effective process of explanation and a fair process for the approval of the Scheme at the class meeting which I have directed and the sanction hearing which is necessary for the terms of the Scheme, in whatever form, to be given legal efficacy.
54. I have been concerned in this regard by the fact that time is running very short. Much remains to be done. Not only must a proper and fair explanation be given, but a class meeting must be held and there must then be proper time for objectors and the like to be able to assemble any representations that they may have as to the overall fairness of the Scheme. I have been concerned lest the timetable proposed, which can be briefly discussed later, is too hurried to enable a proper process; and I have borne very much in mind, in that regard, the more general comments in Mr Huggins' email to me of 9.05 a.m. this morning.
55. Nevertheless, I consider that having regard to the context as a whole and what I perceive to be the recognition even by objectors that the most important thing is that clarity be given immediately to a difficult situation and that anything reasonably capable of being done to ensure a proper process is done, I am agreeable to the timing and the form of explanation which is suggested to me to be given. I emphasise in particular two points in that regard:

(1) The first is that although it has taken me some time to explain my thought processes, for which I apologise, in the end the modifications to the Scheme are reasonably discrete and reasonably capable of being quite efficiently and effectively described in language which does not occasion very much modification to the language already circulated. I do not think that this is a matter of, as it were, rewriting the universe. It is a matter of explaining a particular glitch and its solution. I do not see that it is such a departure as needs very much more time for its consideration.

(2) The second is this: it has been submitted to me, and I accept, that no additional class problem is introduced by the modification. It is not, therefore, a matter which causes me to review the decision that I have already made on the original Scheme, that a single class meeting of all series of dated noteholders is an appropriate and satisfactory means of approval. Of course, if that were different, the position would in effect mean that I would have to decline the modifications as introducing a new difficulty which would destabilise the whole process, or at the very least would complicate it.

56. Overall, I should also mention a further factor which has weighed with me. Although the objectors have made powerful and valid points in terms of their own personal position, overall it seems to me that the intention of the Bank in agreeing to the minimum allocation was not to undermine the objective, so far as possible, of pro rata allocation according to the amount of the Dated Notes held, and that the Scheme as modified does or does nearly achieve that initial objective. If I did not think that, taken in the round, this was at least as fair and possibly a fairer Scheme than was originally proposed, then I would have, I think, exercised my discretion in a different way. Put another way: if I considered the Scheme overall, having regard to the whole body of all dated noteholders, to be unfair, I would have thought long and hard and probably rejected the modification. But that is not the view that I have formed.
57. Accordingly, the long and the short of it is that I am prepared, even by way of indulgence in not requiring a re-presentation of the Scheme documentation, to agree to the going forward to approval, and ultimate sanction of the court, of the Scheme as proposed to be modified. That leaves two final questions to address.
58. The first is that a further glitch has been identified in the context of the Scheme. This is explained by Mr Booker in section H of his second witness statement, and relates to difficulties in respect of one particular aspect of the CREST system. I think I can cut through this (if necessary, I can elaborate on it, if for the future record or other purposes it is considered relevant) by saying that the modifications proposed were not objected to as such and seemed to be sensible in the circumstances.
59. The final matter, subject to a detailed consideration of the proposed order, is the point raised by Mr Pocock with respect to confidential information, possible insider trading and breaches of section 178 of FSMA. I do not by any means seek to disparage or discount those allegations. What I can say, however, is that, on my having made enquiries, the Regulator is aware of them and has not chosen itself to make any points in that regard. If there is a regulatory point, then it is a matter which would have to be taken very seriously, and I urge the Bank, as I am sure they will, to confide in the Regulator and share with the Regulator all the points that have been made, including the emails which have been circulated, especially by Mr Pocock, to make quite sure that there is no regulatory impediment or any regulatory breach involved in the promulgation of the Scheme.
60. If, contrary to my expectation, having regard to the third witness statement of Mr Booker, the Regulators were to take the view that there is some regulatory impediment or block, then they are to have liberty to apply to restore this to me, as a matter of urgency, in order to determine whether, notwithstanding the other matters which I have cleared, this is a matter which should stand in the way of the Scheme.
61. I also make clear that, though I have sought to introduce clarity to my view by expressing it with firmness on the other matters, nevertheless I cannot preclude and would not wish to preclude arguments at the hearing for the sanction of the Scheme of any matters, including this matter, were it to bear on the essential question of fairness which it is that court's task to consider.
62. I apologise for the length of this judgment. I have given it in extenso, subject to the caveats that I have made clear, in order that the objectors and persons in a like position should know the basis on which the court has proceeded and have the reassurance that the court has, to the best of its ability, taken very carefully into consideration all that they have said.




ANNEX 1 paraAgraphs 14 to 27 of the Second Witness Statement of Niall Booker dated 1 December 2013

C. THE POTENTIAL ISSUE

63. In the absence of the Minimum Allocation requirement referred to above, in the event that all Noteholders subscribed for their proportionate share of the Additional New Ordinary Shares, each Subscribing Noteholder ought to have received its rateable proportion of Additional New Ordinary Shares through the Open Offer. I am informed by my advisers that in a rights offering or an open offer an investor would normally expect to be allocated a pro rata share of the issue if they subscribed for a pro rata share. However, the Minimum Allocation requirement has the potential for frustrating the outcome of a rateable distribution in the event that a large number of Noteholders with small value Scheme Claims seek to subscribe for the Minimum Subscription. In those circumstances, only the first 1250 Noteholders to submit Account Holder letters would receive any of the Additional New Ordinary Shares, and each of them would receive the Minimum Allocation (50,000) of the Additional New Ordinary Shares.
64. As noted above, under the Existing Scheme, 45% of the equity in the Bank is to be divided pro rata among Scheme Creditors as Scheme Consideration in exchange for the Dated Notes, with the Additional New Ordinary Shares constituting a further 25% of the equity in the Bank.
65. The implied price for each New Ordinary Share issued by the Bank pursuant to the Existing Scheme was, at the time notice of the Scheme Meeting was sent to Scheme Creditors, approximately £4.40. This is based on the then average market price for the Dated Notes of approximately £0.77 for every £1 in principal value of Dated Notes and the then market price of the 5.5555% Bonds, which imply a fair market value for the Bank of approximately £1.1 billion. The Bank proposes to issue a total number of 250 million New Ordinary Shares as its fully diluted new ordinary share capital: currently 30% to Group, 45% to all Scheme Creditors and 25% to those Scheme Creditors wishing to participate in the Open Offer.
66. Under the current terms of the Open Offer, however, the subscription price for the 62,500,000 Additional New Ordinary Shares is £2 per share, which implies a discount of £2.40 per share. The amount of the discount is by no means certain, because of uncertainties which include: (i) whether the implied fair value for the Bank referred to at paraAgraph 16 above is an accurate reflection of the true market value of the Bank; (ii) the unlisted and therefore potentially illiquid nature of the Additional New Ordinary Shares; and (iii) the uncertainty as to the price at which the Additional New Ordinary Shares will actually trade. Nevertheless, a successful subscriber in the Open Offer ought in principle to be able to acquire Additional New Ordinary Shares at a significant discount.
67. The existence of the discount was itself of no concern to the Bank, on the basis that it incentivised Scheme Creditors to subscribe for the Open Offer so as to guarantee raising £125 million. The primary concern of the Bank was to raise the additional capital agreed with the PRA and the Bank was agnostic as to the source of that capital and was therefore prepared to defer to the wishes of the LT2 Group (who were requested to underwrite the Open Offer) as to the amount of the discount.
68. It has, however, subsequently transpired that the combination of the requirement of a Minimum Allocation and the anticipated level of discount under the Open Offer has significant potential to frustrate the ability of Scheme Creditors to obtain Additional New Ordinary Shares broadly pro rata to the quantum of their Scheme Claim, for the reasons noted below. In particular:

(a) This structure potentially encourages holders of Dated Notes to split their holdings through nominees or by transfers to connected persons in order to maximise their gains. This splitting can take the form either of splitting between different persons or legal entities or artificial splitting between nominees where the ultimate beneficial owner and/or person with the ultimate economic interest in the Dated Notes remains the same. Scheme Creditors, for the purposes of voting and most other purposes under the Existing Scheme, are the beneficial owners of and/or the owners of the ultimate economic interest in any of the Dated Notes. Although as a matter of law, the Bank would only recognise a beneficial owner which splits its holding between many nominees as one Scheme Creditor, in practice it may be difficult for the Bank to identify beneficial owners who have artificially split their holding through nominees or be able to challenge or test any implied or express statement that the nominees or connected persons are the ultimate beneficial owner and/or person with the ultimate economic interest in any of the Dated Notes. A recent and stark example of splitting is contained at pages 1 - 662 of NB4. In the course of the night of 27/28 November 2013 the Information Agent received from lawyers in the Cayman Islands signature pages for 125 Lock-up Agreements. The counterparty for each of the Lock Up Agreements is described as European Investment Opportunities SPC (or sometimes as European Investment Opportunities Offshore SPC), a Cayman Island exempted company registered as a segregated portfolio company, acting by the director of European Investment Opportunities SPC (or European Investment Opportunities Offshore SPC as the case may be) on behalf of and for the account of a numbered segregated portfolio, in its capacity as Noteholder. I understand from the Information Agent that each Lock Up Agreement has a segregated portfolio with a slightly different number. In all 125 cases the Consenting Noteholder is shown as holding £1,000 principal amount of the 2033 Dated Notes, and each of the 125 Lock-up Agreements has been signed by the same individual. The Information Agent subsequently received 125 Account Holder Letters, each identifying an account of a segregated portfolio company as holding £1,000 principal amount of the 2033 Dated Notes (£125,000 or approximately 0.013 per cent of the total outstanding value of Dated Notes) and each making an election for the Minimum Subscription of 50,000 Additional New Ordinary Shares (6,250,000 Additional New Ordinary Shares in aggregate or approximately 10% of the Open Offer);

(b) it also encourages investors to purchase a small number of Dated Notes so as to be entitled to subscribe for the Minimum Allocation. 257 Account Holder Letters had been received by the Information Agent on behalf of the Bank as at 1 p.m. on Friday 29 November 2013, including 183 Account Holder Letters from Noteholders with £1,000 of Dated Notes (see further paraAgraph 29 below). Although the Bank has no direct evidence, the Bank considers that the acquisition of positions of £1,000 by investors is very recent and in response to brokers alerting their clients to the possibility of "windfall" profits. Prior to the announcement of the recapitalisation, the Dated Notes were held primarily by UK pension funds and other long only funds. Following the announcement of the recapitalisation, the Dated Notes were acquired in large numbers by hedge funds. On 4 November 2013, 48% of the Dated Notes (approximately £450 million nominal amount by value) were held by 39 holders. The Bank is not aware of any particular reason why prior to the announcement of the Open Offer an investor would seek to acquire only £1,000 of Dated Notes; and

(c) the more investors that subscribe for the Minimum Allocation, the greater is the divergence from a broadly pro rata distribution of Additional New Ordinary Shares. This impacts adversely on the larger holders of Dated Notes, because it prejudices the ability of larger Noteholders to achieve a pro rata distribution of the overall Scheme Consideration in that they will not receive a pro rata distribution of the discounted Additional New Ordinary Shares available in the Open Offer.

69. These consequences have led to concerns amongst larger holders of Dated Notes, including those who are members of the LT2 Group and those who are not. I refer to the letter from Invesco Perpetual (exhibited at pages 663 - 664 of NB4), who are a holder of a substantial amount of Dated Notes but are not a member of the LT2 Group or a Requesting LT2 Group Creditor (as defined below) in which they state:

We are therefore concerned that if sufficient Noteholders make the Minimum Election we, as a Noteholder with a significant holding of Dated Notes, will receive a disproportionately small allocation (or indeed, no allocation) of Additional New Ordinary Shares regardless of the amount of any subscription we make. On this basis we consider that the current allocation mechanism in the Additional New Ordinary Shares Offer may prejudice large Noteholders such as ourselves who want to participate in the Additional New Ordinary Shares Offer.

70. The solution identified by the Bank, as described further below, is to increase the number of New Ordinary Shares to be issued as part of the Scheme Consideration and correspondingly reduce the number of Additional New Ordinary Shares, which will result in the discount on the Additional New Ordinary Shares available in the Open Offer being substantially reduced.

D. THE REQUEST FOR AMENDMENT

71. Scheme Creditors, holding (it is believed), in aggregate over 60% of the Dated Notes have requested and/or have written to the Bank supporting a modification to the Existing Scheme (the Modification). Certain members of an ad hoc group of fund managers, nine of whom were original members of the LT2 Group, manage funds holding approximately 55% of the Dated Notes (the Requesting LT2 Group Creditors). The Requesting LT2 Group Creditors have executed lock up agreements (the New Lock-up Agreements) pursuant to which they have agreed, among other things, to vote their Scheme Claims in favour of the Existing Scheme as modified by the Modification (the Modified Scheme) or, if the Court does not give the directions which are sought in this application, to re-confirm their obligations under the existing Lock-up Agreements to vote for the Existing Scheme.
72. In summary, the Modification, as set out in the formal request and statement of support dated 28 November 2013 from Moelis & Company UK LLP on behalf of the ad hoc group of Scheme Creditors (exhibited at pages 665 - 668 of NB4) would involve:

(a) reducing the number of Additional New Ordinary Shares from 62,500,000 to 33,333,334;

(b) increasing the subscription price for each Additional New Ordinary Share from £2.00 to £3.75 per Additional New Ordinary Share;

(c) increasing the number of New Ordinary Shares from 112,500,000 to 141,666,666 (with the effective subscription price for the New Ordinary Shares adjusted down accordingly); and

(d) decreasing the New Ordinary Shares conversion price of the Dated Notes from £7.77 to £6.17 (both figures approximate).

73. The Bank considers that the Modification will deal with the issues which have arisen under the Existing Scheme in the following manner. The Minimum Subscription and Minimum Allocation remain as terms in the Modified Scheme. No issue therefore arises under section 85 of FSMA. However, the change in the pricing in the Open Offer, together with movements in the prices of the Existing Securities, will reduce the differential between the implied price of the New Ordinary Shares, issued as part of the Scheme Consideration and the Additional New Ordinary Shares, issued pursuant to the Open Offer. While, therefore, the issues identified in paraAgraph 19 above remain theoretically possible under the Modified Scheme, they are much less likely to materialise given that the new pricing substantially reduces the incentive for Noteholders to participate in the Open Offer by way of the Minimum Subscription.
74. I refer to the statement of support from the Requesting LT2 Group Creditors (exhibited at page 667 - 668 of NB4) in which they state:

In these circumstances we are fully supportive of a modification to the Scheme and the Additional New Ordinary Share Offer which reduces the incentive for market participants to profit by purchasing small quantities of Dated Notes and subscribing for the minimum £50,000) number of shares. The adjustment to the price to £3.75 per share for the shares being offered in the Additional New Ordinary Share Offer is a sensible and reasonable way to achieve this result while at the same time preserving an appropriate benefit for Noteholders who are willing to commit funds to purchase the unlisted shares. We consider that the proposed modification will remove a substantial incentive to Noteholders who are not locked-up to vote against the Scheme and the proposed modification will thereby maintain the high degree of confidence required by the PRA as to the likely success of the Liability Management Exercise being undertaken by the Bank.

75. The market prices of the Dated Notes have fallen recently and, based on the market prices of the Dated Notes as at close of business on 26 November 2013, the implied fair market value of the Bank was approximately £950 million (on the assumption that the fall in the price is reflective of the value of the Bank). 250 million shares will continue to be offered as part of the Recapitalisation Plan which implies a price per share of £3.80. This compares to the price per share of £3.75 in the Open Offer. The implied price per share of the equity available in the debt/equity conversion under the Modified Scheme is £3.81 per share. The existing allocation mechanism for the Open Offer, as described in Booker 1 at paraAgraphs 54 to 57, therefore remains unchanged.
76. The Requesting LT2 Group Creditors and the other members of the LT2 Group executed Lock-up Agreements dated 4 November 2013 in which they agreed, among other things, to vote in favour of the Existing Scheme. The Lock-up Agreements of the original members of the LT2 Group terminated on the date on which they entered into the New Lock-up Agreements. The Lock-up Agreements entered into by members of the LT2 Group who have not entered into New Lock-up Agreements have become terminable. However, the Bank is not concerned in relation to these Lock-up Agreements becoming terminable given the overall level of support for the Modified Scheme evidenced by the supporting creditors to this application.