litigation. 

financial world. Its effects are still being felt today. It is perhaps ironic that in the result, at least in the case of LBIE, the process of administration has yielded a very substantial surplus; and that the litigation sought to be resolved by the Scheme, and which is delaying the completion of administration, relates not to deficiencies but to the unusual legal issues relating to surplus assets (“the Surplus”). 

Supreme Court, they would be exposed to the risk of personal liability. That is not a risk that any office-holder can reasonably be expected to bear. Thus, until the Relevant Proceedings are dealt with, the Surplus will remain locked in the estate. 

Part B: structure of this Judgment and representation of creditors at the Hearing

(1)   In Part C, I describe in greater detail both (a) the directions so far given by the Court on the basis of which the Administrators propose to proceed (and which the Scheme thus reflects) and

(b) the Relevant Proceedings;

(2)   In Part D, I summarise the relevant terms of the Scheme (largely incorporating for that purpose the summary provided in the Administrators’ skeleton argument);

(3)   In Part E, I describe the composition of the Scheme Meetings and the voting results at such meetings;

(4)   In Part F, I set out the principles which are to be considered by the Court in determining whether to sanction a scheme such as

this;

(5)   In Part G, I consider an important element in the application of those principles, being what significance the Court should attach to the voting results at the class meetings, and whether there were cross-holdings or other interests such as should reduce or negate reliance on the majority approvals that those votes expressed;

(6)   In Part H, I consider the overall fairness of the Scheme, and in that context, objections put forward in respect of it in correspondence;

(7)   In Part I, I address questions as to the Court’s international jurisdiction in respect of the Scheme and as to recognition internationally of the exercise of jurisdiction.

(8)   Part J is my conclusion.  

(1)   Mr William Trower QC, Mr Daniel Bayfield QC and Mr Ryan Perkins appeared for the Administrators;

(2)   Mr Robin Dicker QC, Mr Richard Fisher and Mr Henry Phillips appeared for supporting creditors, namely Burlington Loan Management Limited, CVI GVF (Lux) Master S.a.r.l, and Hutchinson Investors LLC (collectively, the “Senior Creditor Group”);

(3)   Mr David Allison QC and Mr Adam Al-Attar appeared for another group of supporting creditors, namely the Wentworth Group, which comprises investment funds controlled by King Street and Elliott, LBHI, and certain SPVs, including, Wentworth Sons Sub-Debt S.à r.l. (the “Subordinated Creditor”) and Wentworth Sons Senior Claims S.à r.l.;  

(4)   Mr Peter Arden QC and Ms Louise Hutton appeared for LBHI2 and its Administrators.

Part C: the directions so far given and the Relevant Proceedings

(1)   Whether the Sub-Debt claims ranked ahead or behind statutory interest claims pursuant to rule 2.88(7) of the Insolvency (England and Wales) Rules 2016 (the “IR 2016”);

(2)   Whether creditors who had suffered a currency loss as a result of the conversion of their debts from foreign currency into sterling as at the date of the commencement of the administration could claim and prove for such losses, and if so whether such a claim would rank ahead of or behind the Sub-Debt claims and/or statutory interest claims;

(3)   Whether contractual interest was provable or statutory interest was payable for the period of administration if it was immediately followed by a liquidation.

(1)    First, the Surplus must be applied towards the payment of statutory interest in accordance with rule 14.23 of the IR 2016. Statutory interest is payable on provable debts at the greater of 8% per annum or the “rate applicable to the debt apart from the administration” (typically a contractual rate): see rule 14.23(7). Some creditors have a contractual discretion to certify the rate of interest applicable to their claims, which could (in principle) enable them to claim statutory interest at a rate greater than the 8% minimum. However, the exercise of any such contractual discretion is capable of giving rise to a number of disputes, and creates significant uncertainty in quantifying the total amount of statutory interest which falls to be paid: see below. Total statutory interest entitlements are likely to exceed £5bn, and are likely to be paid in full out of the Surplus. 

Part D: summary of the terms of the Scheme

               (a)    Application of the Scheme 

creditors: 

(1)   Storm has undertaken to be bound by the Scheme. This reflects the fact that Storm has a bespoke arrangement in relation to statutory interest pursuant to a commercial settlement dated 17 March 2014, which provides that any payment made to Storm in respect of statutory interest would be paid in respect of its admitted claim at an effective rate of 8% simple interest per annum, but calculated from a date later than the date of the commencement of LBIE’s administration to the date when Storm's admitted claim was paid in full. Storm and the Scheme Creditors are collectively described as the “Scheme Parties”. For convenience, in this Judgment I refer simply to the Scheme Creditors, but it should be understood that Storm is also bound.  

(2)   The purpose of excluding from the Scheme any Relevant Employees or Relevant Jurisdiction Clause Creditors who have not lodged a proof of debt in LBIE’s administration relates to a jurisdictional issue explained below.   

(3)   LBHI2 (in its capacity as shareholder of LBIE) is not a Scheme Creditor but has signed a deed of undertaking containing certain obligations in connection with the Scheme given in consideration for third party rights and undertakings granted in LBHI2’s favour. 

(b) Termination of Relevant Proceedings

(1)   Each Scheme Creditor waives its right to challenge the admission of any other creditor’s proof of debt (where the relevant proof was admitted prior to the Record Date). This will avoid the risk of the Olivant Application being repeated for other proofs of debt, which would be likely to lead to significant delays and costs. 

(2)   Subject to certain exceptions, each Scheme Creditor waives its right to appeal any first instance decision (of any court of competent jurisdiction) which relates to an exercise of the Administrators’ functions after the date when the Scheme becomes effective (the “Effective Date”). Thus, by way of example, in the unexpected event that a new proof of debt is submitted prior to the Effective Date and rejected by the Administrators after the Effective Date, any challenge to the Administrators’ decision would be resolved by the High Court, and there would be no possibility of any appeal to the Court of Appeal or the Supreme Court. This provision is intended to avoid the substantial delays and costs that would be likely to result from appellate proceedings. 

(c) Bar Date

               (e)     Statutory Interest Claims and the adjudication process 

               (i)      The various statutory interest entitlements

adjudication of creditors’ statutory interest entitlements, effectively in substitution for the Relevant Proceedings. I shall return later to assess the fairness of the mechanism: I confine myself now to a statement of its essential features, as described in the Applicants’ skeleton argument (which statement I gratefully adopt with only minor alterations).

(1)    8% Creditors. As noted above, statutory interest is payable on provable debts at the greater of 8% per annum or the “rate applicable to the debt apart from the administration” (typically a contractual rate): see rule 14.23(7). For many creditors, there is no “rate applicable to the debt apart from the administration”. Such creditors can only receive interest at the statutory minimum of 8% per annum. These creditors are described as “8% Creditors”. 

(2)    Specified Interest Creditors. One claim arises under a contract which requires LBIE to pay a specific rate of interest in excess of 8% per annum. The sole creditor holding this claim is described as the “Specified Interest Creditor”. 

(3)    Higher Rate Creditors. A number of claims arise under financial master agreements which give the creditor a contractual discretion to determine the rate of interest payable by LBIE. For example, the

(1)    Each Higher Rate Creditor is entitled to elect between two

alternative options:

(a)   The first option is for the creditor to receive statutory interest at a simple rate of 8% per annum, plus an additional payment equal to 2.5% of the value of the creditor’s admitted provable claim (the “Settlement Premium”) in full and final satisfaction of the creditor’s statutory interest entitlement. The Settlement Premium represents the quid pro quo for waiving the right to certify a rate higher than the statutory minimum of 8%. Alternatively:

(b)   The second option is for the creditor to certify the rate and amount of interest applicable to the creditor’s claim in accordance with the underlying contract.

The certification must be submitted by the Effective Date. Creditors who choose the second option are not entitled to receive the Settlement Premium.

(2)   The stipulated deadline for certification is the Effective Date. The justification advanced for this (which I have accepted) is as follows: (i) the first progress report which disclosed the possibility of a surplus in the estate was issued in April 2013 (at which point all Higher Rate Creditors should have realised that certification could be necessary); (ii) the Waterfall IIC judgment was handed down in October 2016 (which set out the key legal principles relating to certification); and (iii) creditors have been aware of the proposed certification deadline since 18 April 2018, when the first Practice Statement Letter (“First PSL”) was circulated; so that (it is submitted) (iv) Higher Rate Creditors have had sufficient time to assess whether to certify and prepare any such certification. This is borne out by the Chairman’s Report: see below.  

(3)   If a Higher Rate Creditor failed to make an election at the time of voting on the Scheme, the creditor is deemed to have elected to receive the Settlement Premium. 

(4)   Where a Higher Rate Creditor submits a certification by the Effective Date, LBIE may either: (i) accept the certification; (ii) reject the certification entirely (on the basis that the creditor should not receive more than the statutory minimum of 8%); or (iii) make a counter-offer (higher than the statutory minimum but lower than the certified amount).

(5)   If the Higher Rate Creditor is not satisfied with LBIE’s decision, the creditor is entitled to require that the dispute be resolved by an independent adjudicator. 

               (iii)    Key features of adjudication process

(1)    The adjudicator will be either Sir Bernard Rix, Michael Brindle QC or Tim Howe QC (or, if none of them is available, another English law-qualified QC or retired judge). 

(2)    The adjudicator will act an as expert, not an arbitrator. 

(3)    The adjudication will be determined on paper, without an oral hearing. The relevant Higher Rate Creditor and LBIE are both entitled to file written submissions and supporting evidence. 

(4)    In reaching a decision, the adjudicator must have regard to a number of legal principles referred to as the “Relevant Principles”. These are set out in the Explanatory Statement prepared by the Company and the Administrators, and dated 31 May 2018. 

(5)    The Relevant Principles comprise the following: (i) the principles set out in the judgment and order in the Waterfall IIC Application;

(ii) the principles relating to the AFB/FBF French Master Agreements which were agreed to be correct by the parties to the Waterfall IIC Application (but which were not the subject of any formal determination by the Court); (iii) the principles set out in the judgments and orders of David Richards J and the Court of Appeal in the Waterfall IIA Application; and (iv) a further principle regulating the calculation of the amount of Statutory Interest defined in the Scheme as the Compounding Principle, and further explained subsequently in the Scheme.

(6)    Although the adjudicator must “have regard” to the Relevant Principles, it is recognised that these principles do not provide an exhaustive codification of the law. The parties are able to file legal submissions in relation to any issues which may arise, and the adjudicator is entitled to take those submissions into account when reaching his decision. 

(7)    The adjudicator must uphold the creditor’s certification unless the adjudicator is satisfied, on the balance of probabilities, that it was made irrationally, in bad faith, or contrary to the Relevant Principles. The burden of proof falls on LBIE. (There is also a mechanism for addressing and correcting any mathematical or numerical errors which the adjudicator identifies.)

(8)    If (and only if) the adjudicator concludes that the certification was made irrationally, in bad faith, or contrary to the Relevant Principles, then the adjudicator must award the creditor the statutory minimum of 8% or (if any counter-offer was made) the amount of LBIE’s counter-offer. There is no other option available to the adjudicator. In particular, the adjudicator is not permitted to award some amount falling between the creditor’s certification and LBIE’s counter-offer. 

(9)    The timetable for the adjudication is deliberately compressed, as explained in a useful  flow chart at Part II, paragraph 10.10 of the Explanatory Statement, which identifies the number of business days between each step in the adjudication process. For example, once the adjudicator receives LBIE’s written submissions, the adjudicator is required to use reasonable endeavours to reach a final decision within 20 business days.  

(10)   The adjudicator will not give reasons for the decision; and that decision is final and binding, and is not capable of being appealed (except in the case of fraud or bias by the adjudicator). 

(1)    LBIE must consult with the Subordinated Creditor in deciding whether or not to accept a certification, although LBIE has the sole discretion as to whether or not to accept any certification.

(2)    LBIE must consult with the Subordinated Creditor as to the amount of any counter-offer, although (once again) LBIE has the sole discretion as to the amount of any counter-offer. The counteroffer must be made in accordance with the Relevant Principles. (Under a previous version of the Scheme (which was placed before the Court at the Convening Hearing), the Subordinated Creditor had the right to determine the amount of any counter-offer. Some creditors objected to this provision at the Convening Hearing. In order to accommodate the concerns that were raised, the Scheme was amended (prior to the Scheme Meetings) so as to remove the Subordinated Creditor’s right to determine the amount of any counter-offer. That right is now vested in LBIE, and the Subordinated Creditor merely has a right of consultation.) Thus, the Subordinated Creditor cannot require LBIE to make a counteroffer: if LBIE considers that the creditor’s certification should be accepted without any modification, that outcome cannot be prevented by the Subordinated Creditor. Further, the counter-offer can be rejected and the matter appealed through the adjudication procedure. 

               (f) Other matters relating to the Scheme: Lock-Up Agreement and consent fee

(1)   Late in the evening on 25 April 2018 (after the First PSL had already been circulated to creditors), the LBIE Administrators received a letter from LBHI2’s administrators [CH2/RD2/8] which indicated that Wentworth Sons Senior Claims S.à r.l., the Subordinated Creditor and certain members of the Senior Creditor Group had entered into a separate settlement agreement in parallel with the Lock-Up Agreement (the “Settlement Agreement”).

(2)   The Settlement Agreement provided that (amongst other things) the Senior Creditor Group would receive from those Wentworth parties the sum of £35m by way of a “consent fee” in the event that the Scheme becomes effective. The Administrators received a copy of the Settlement Agreement on 29 April 2018. 

(3)   No similar consent fee was offered to other creditors. The Administrators had not previously been aware of these arrangements. As a result of this disclosure, the Administrators sent a second PSL (the “Second PSL”, published on 2 May 2018) referring to and explaining the consent fee, and proposing that the Senior Creditor Group should vote in a separate class in order to avoid a dispute about class composition: see below. 

               (g)             Third party releases

(1)    Any “Administration Claims (being Claims against the Administrators or the Released Third Parties (who are parties connected to the Administrators, their firm or the Company), where such Claims arise from actions taken by such person on or after the Administration Date but prior to the Effective Date), but only to the extent that the Administrators or Released Third Parties would have an indemnity or other similar claim against the Company”; and

(2)    Subject to certain exceptions, any “Released Scheme Implementation Claims (being Claims against the Company, the Administrators, the Released Third Parties or the Locked-Up Parties) where such Claims arise from or in connection with action taken by any such person on or after 1 November 2017 in relation to the proposal or implementation of the Scheme)”. 

(3)    There are also various releases in favour of LBHI2, e.g. in relation to any Creditor Contributory Claim Rights (as defined). 

Part E: composition of classes and the Scheme Meetings 

(1)    A meeting of the 8% Creditors and the Specified Interest Creditor, excluding claims legally held by the Senior Creditor Group (the “8% Meeting”); 

(2)    A meeting of the Higher Rate Creditors, excluding claims legally held by the Senior Creditor Group (the “Higher Rate Meeting”); 

(3)    A meeting of all members of the Senior Creditor Group (the “SCG

Meeting”); and 

(4)    A meeting of the Subordinated Creditor (the “Subordinated Creditor Meeting”). 

“does not…object to the court’s sanctioning the proposed scheme, should the court see fit to do so.”  

Voting results at the class meetings

(1)    At the 8% Creditor Meeting, the Scheme was approved by 129 out of the 132 votes cast, representing 97.7% in number and 96.3% in value of those voting. The turnout by reference to claim value at the 8% Creditor Meeting was equal to 96.1% of those

entitled to vote. 

(2)    At the Higher Rate Creditor Meeting, the Scheme was approved by 74 out of the 78 votes cast – representing 94.9% in number and 88.0% in value. The turnout by reference to claim value at the meeting was equal to 94.9% of those entitled to vote. 

(3)    Only 3 creditors (out of 130) voted against the Scheme at the 8% Creditor Meeting, and only 4 creditors (out of 77) – two of which are members of the same corporate group –  voted against the Scheme at the Higher Rate Creditor Meeting. 

(4)    The Senior Creditor Group voted in a separate class from other 8% Creditors and Higher Rate Creditors. Accordingly, the voting figures for the 8% Meeting and the Higher Rate Meeting do not include claims held by the Senior Creditor Group. 

(5)    Those statutory majorities would have been obtained even if all of the Increased Voting Rights Requests had been rejected in their entirety or if only the Increased Voting Rights Requests made by the “no” voters were admitted.

(6)    If the Wentworth Senior Creditors had been excluded from the 8% Creditor Meeting, the Scheme would still have been approved by 115 creditors, representing 97.5% in number and 93.7% in value.

(7)    If the Wentworth Senior Creditors had been excluded from the Higher Rate Meeting, the Scheme would still have been approved by 62 creditors, representing 93.9% in number: but they would have represented only 62.2% in value (thus falling short of the statutory majority required of 75%).  

(1)    “The votes referred to in the “Others” column of the table…includes votes that are controlled by entities that are part of the Wentworth Group and the Senior Creditor Group. Our client does not know the extent of the claims controlled by the Wentworth Group and Senior Creditor Group within the “Others” column.

(2)    Recognising that the Judge has indicated that he is not minded to revisit class composition issues, if [the Higher Rate Creditors Meeting] had proceeded without claims held directly by the Wentworth Group (i.e. of the Wentworth Group votes are excluded from the votes at [that meeting]), then the scheme would not have obtained the required statutory majority by value [at that meeting]. All the more so if claims controlled but not directly held by the Wentworth Group and the Senior Creditor Group had been excluded.”

Part F: the Court’s jurisdiction and principles as to its exercise

“(1) If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting summoned under section 896, agree to any compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement. 

(2) An application under this section may be made by – (a) the company ...

(3) A compromise or arrangement sanctioned by the court is binding on – (a) all creditors or the class of creditors or on the members or a class of members ... and (b) the company ...”

involves a three-stage test:

(1)    At the first stage, the Court must consider whether the provisions of the statute have been complied with. 

(2)    At the second stage, the Court must consider whether the class was fairly represented by the meeting, and whether the majority are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent. 

(3)    At the third stage, the Court must consider whether the scheme is one which a creditor might reasonably approve. If the scheme is one which a creditor could reasonably approve, it is said to be “fair”, even though the Court retains ultimate and unfettered discretion whether to sanction a scheme, and to withhold sanction if it considers there is nevertheless some overriding unfairness in the scheme or the manner in which it has been presented or notified and explained, or in the event that some ‘blot’ is found. Indeed, there is no entitlement to have a ‘fair’ scheme sanctioned: the exercise of its jurisdiction being discretionary, the Court is not obliged to sanction a scheme.

“those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”: 

“The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their own private interests not derived from their legal rights against the company is not a ground for calling separate meetings … The question is whether the rights which are to be released or varied under the scheme or the new rights which the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class.”

(1)    To the extent that any of the Wentworth Senior Creditors is an 8% Creditor, a Specified Interest Creditor or a Higher Rate Creditor, the rights given to them under the Scheme (in their capacity as such) are precisely the same as the rights given to other creditors. 

(2)    Even if the Wentworth Senior Creditors were motivated to exercise their voting rights as 8% Creditors, Specified Interest Creditors or Higher Rate Creditors in order to enhance the recovery of the Sub-Debt, that is a classic example of a point that may go to fairness, rather than class composition.

(3)    In the absence of a relevant difference between the legal rights of the Wentworth Senior Creditors (qua 8% Creditors, Specified Interest Creditors or Higher Rate Creditors) and the legal rights of other creditors in those classes, the question of whether those creditors can “consult together with a view to their common interest” does not arise. As explained above, there is no relevant difference in rights. 

“As you know, our client Goldman Sachs International (“GSI”) has raised concerns about the fairness of the Scheme, and for that reason voted against the proposed scheme. GSI continues to consider that the proposed scheme is unfair, in particular because of the arrangements between the SCG and Wentworth, where the SCG is being paid at least £35 million to support the proposed scheme and compromise its appeal rights in the Waterfall IIC appeal. The same incentive is not available to other Higher Rate Creditors including GSI which will be deprived of its appeal rights under the proposed scheme. In effect, the SCG is being paid at least £35 million in consideration of it not pursuing the Waterfall IIC appeal, while GSI is simply being stripped of that right without compensation. Other Higher Rate Creditors who stand to benefit if GSI succeeds in the

Waterfall IIC appeal are similarly prejudiced.”

The objection is expressed as being on grounds of unfairness. I consider it later at the second and third stages of my assessment. It is not presented as an objection to class constitution. Although it is fair to acknowledge that this may be in deference to the decision already made on 11 June 2018, I think that the point does really go to fairness.  As it seems to me, these matters are relevant at a subsequent stage in the assessment of the Scheme, and I consider them later accordingly at the second and third stages of my assessment. But for the purposes of this first stage, I remain satisfied that the fact that, after the arrangements (to which the Administrators were not party) were revealed, a separate class for the Senior Creditor Groupwas conceived to be advisable and probably necessary, has removed that source of concern in the context of class composition.

constituted. 

Part G: whether each class was fairly represented by those attending 

“if an allegation is made that a creditor had improper regard to interests other than those of the class to which he belonged, it is necessary for there to be a ‘but for’ link between the collateral interest and the decision to vote in the way that he did. The person challenging the relevant vote must therefore show that an intelligent and honest member of the class without those collateral interests could not have voted in the way that he did.”

“inclined to think that test was put at too high a level, and that it should be sufficient to establish that an interest was likely to have, for example, a real or substantial impact on the vote of a member of a class, to raise a question whether that class member’s vote is representative of the class as a whole”.

“the votes neither of Mr Booth nor of the British Government would have been given for the scheme had they been influenced only by what was most in the interest of the bondholder.” 

“[The votes] must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only.”

(emphasis added)

(1)   One of the earliest relevant decisions, Re Alabama, depicts the treatment of an unrepresentative vote as a discretionary matter for the Court. See, for example, the speech of Bowen LJ at 244:

“[A]lthough in a meeting which is to be held under this section it is perfectly fair for every man to do that which is best for himself, yet the Court, which has to see what is reasonable and just as regards the interests of the whole class, would certainly be very much influenced in its decision, if it turned out that the majority was composed of persons who had not really the interests of that class at stake.”

(2)   In Re UDL, Lord Millett said at 185:

“The court will decline to sanction a scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.” 

These remarks draw a clear distinction between discounting and disregarding a vote. The word “may” indicates that the matter is discretionary. 

“It seems to me that the lesser weight to be given to the votes of interested creditors, in the exercise of the Court’s discretion whether to approve the schemes, in their original or altered forms, is not a mathematical exercise”. 

Application of these principles in the present case

Hearing:

“It is accepted that the Wentworth Senior Creditors have an interest not shared by other members of the classes to which they belong. The special interest arises out of the relationship between the Wentworth Senior Creditors and the Subordinated Creditor. It is understood that the Wentworth Senior Creditors (or those controlling them) are entitled to a proportion of the recoveries of the Subordinated Creditor, pursuant to a joint venture arrangement between the various members of the Wentworth Group.

It is understood that the joint venture was established in January 2014, but the Administrators do not know the precise terms of the joint venture. The Administrators have received a term sheet which describes the terms of the Wentworth joint venture (the “WW Term Sheet”)… The WW Term Sheet requires members of the Wentworth Group to promote the “Underlying Principle”:

“The parties (i) shall act or, to their knowledge, omit to act, in accordance with the underlying principle of enhancing the recoveries for the Recovery Pool and the Preferred Equity and (ii) shall not act in a manner adverse to the economic interests of the

LBHI2 Scheduled Creditors (in their capacity as such) …”

The “Recovery Pool” is defined as: “the recovery pool consisting of all the assets in, or deriving from, the LBHI2 Contribution, the KS Contribution and the Elliott Contribution (as adjusted to include the LBHI Contribution, to the extent required).” The WW Term Sheet contains a complex series of provisions which deal with the parties’ obligations to contribute to, and the parties’ rights to share in, the Recovery Pool.” 

(1)    Properly understood, the Wentworth Senior Creditors’ interest in the Sub-Debt is not adverse to the interests of the other Higher Rate Creditors in the context of the Scheme, but aligned. 

(2)    There has been no coercion of the minority, as can been seen from the high level of support obtained from “independent” creditors.

(3)    Further, the Wentworth Senior Creditors’ interest in the Sub-Debt is not (and cannot rationally be) their dominant causative reason for supporting the Scheme. 

(4)    Even if that is wrong (such that the Wentworth Senior Creditors are not representative of their respective classes), their votes should be discounted rather than disregarded. 

“in consideration of it not pursuing the Waterfall IIC appeal”, whereas GSI is simply being stripped of the right “without compensation”. Insofar as this point was intended to suggest adverse interest, the short response is (as will already be apparent) that in light of the emergence of the arrangements for the payment to them, the Senior Creditor Group was not included in the Higher Rate Interest creditor class and was placed in a class of its own. 

Part H: the overall fairness of the Scheme

“Higher Rate Creditors who control a number of different Claims should be able to take the Certification Option for some of those Claims and the Settlement Option for others. The merits of pursuing the Certification Option for ISDA claims will, absent any other considerations, be entirely fact and circumstance specific to each relevant payee. Creditors should therefore have the freedom to exercise different options in respect of their different claims, and not be subjected to the unfair penalty of being deprived of the 2.5% premium for claims which they would otherwise not certify, simply because a Creditor elects to pursue its legitimate rights of certification in respect of other claims.”

Gottlieb’s letter dated 8 June 2018, was as follows: 

“As it stands, the Scheme provides no form of compensation for the loss of appeal rights against the Waterfall IIC judgment. Whether equivalent to the £35m ‘consent fee’ payable to the SCG or otherwise, such compensation should fairly be paid to all Higher Rate Creditors.”

(1)   It is not likely to be correct to regard the agreed sum of £35 million as being in consideration of not pursuing the Waterfall IIC appeal. Pursuant to the Lock-Up Agreement, the Senior Creditor Group agreed not to certify the cost of funding for any of its claims. This may have involved a significant transfer of value (if some of the Senior Creditor Group’s claims had a high cost of funding) from the Senior Creditor Group to the 8% Creditors, the Specified Interest Creditors and the other Higher Rate Creditors (in the event that the Surplus is not sufficient to pay statutory interest in full) or to the Subordinated Creditor or LBHI2 (if the Surplus extends beyond that needed to pay statutory interest in full).

(2)   It is simplistic or tunnel-visioned to depict GSI as receiving no consideration. It receives consideration in the form of the benefits which all creditors will obtain from the Scheme, and especially accelerated payment of the Surplus. Other Higher Rate creditors appear to accept the give and take. 

(3)   These objectives in common seem to me to be ones which any creditor, including a Higher Rate Interest creditor (and, in particular, Wentworth) could well and entirely reasonably be willing to support.

(4)   Moreover, the consent fee is not part of the Scheme, but is a private arrangement between the Wentworth Group and the Senior Creditor Group. 

(5)   The Scheme has been approved by a large majority of creditors who are not entitled to receive any consent fee, and there is no reason for the Court to second-guess their commercial assessment.

“Higher Rate Creditors which take the Certification Option should not be effectively subordinated to Specified Interest Creditors, those with 8% Interest Claims and those Higher Rate Creditors which take the Settlement Premium Option through the delay in payment. Higher Rate Creditors which take the Certification Option should be paid the minimum of 8% simple interest at the same time that all other interest is paid by the Company (provided, of course, that the Company has sufficient funds to do so), with only payment of any excess arising from the Certification process deferred.”

However:

(1)   As Mr Russell Downs put it on behalf of the Administrators, 

“…this concern overlooks the fact that Certifying Creditors will still receive their Statutory Interest far sooner than they would but for the Scheme and any delay to receipt of their entitlement will be minor.”

(2)   The procedure has been designed to be expeditious and streamlined. The timetable for the adjudication is deliberately compressed so as to avoid any substantial delay. For example, once the adjudicator receives LBIE’s written submissions, the adjudicator is required to use reasonable endeavours to reach a final decision within 20 business days. A certifying creditor will receive its statutory interest far more quickly than it would but for the Scheme. Pending the adjudicator’s determination, LBIE will hold a reserve equal to the certified sum so as to prevent any prejudice to the certifying creditor.

(3)   A two-stage process would by contrast be more expensive, less straightforward and likely to be productive of delay.

“The Wentworth Group should have no right to be informed of Certification Claims or to be consulted by the Company on those Claims. Certification Claims should be confidential as between the Certifying Creditor and the Company, whose Joint Administrators should approach the Claims in good faith and in a manner consistent with their obligations as officers of the court.”

(1)   A right to consult is not a right to dictate. The Administrators retain their discretion in its entirety, and are not fettered by the preferences of the Subordinated Creditor. The Administrators are free to deal with a certification in any way they think fit. There is nothing that prevents the Administrators from “acting in good faith and in a manner consistent with their obligations as officers of the court”.

(2)   As Counsel for the Administrators pointed out, the information and consultation rights afforded to the Subordinated Creditor have parallels outside of the Scheme. For example:

(a)           Creditors are allowed to inspect the proofs lodged by other creditors (see rule 14.6 of the IR 2016), and are empowered to challenge the admission of proofs filed by other creditors (see rule 14.8 of the IR 2016 and paragraph 74 of Schedule B1 to the Insolvency Act 1986). 

(b)           In the event of a challenge, the challenging creditor would be entitled to obtain disclosure of all relevant documents (including any relevant confidential materials) and would be fully involved in the proceedings. 

“If the Company rejects a Certification Claim, the Company should give reasons why it is doing so. Only then will the Certifying Creditor know what case it has to meet should it wish to take the Claim further and, if so, what additional evidence it should provide to the Adjudicator.”

(1)   Fairness does not require the giving of reasons in the context of an expert determination, just as it does not require an oral hearing. Indeed, at least in the context of an expert determination of value, 

“the classic rule is that silence is golden and the expert should give no explanation as to how he has come to his decision, leaving it unassailable even if apparently low or high” per Harman J in Re a Company, ex p Holden [1991] BCLC 594 at 603d.

(2)   See also See Morgan Sindall plc v Sawston Farms (Cambs) Ltd [1999] 1 EGLR 90 at 92-93:

“The whole point of instructing a valuer to act as an expert (and not as an arbitrator) is to achieve certainty by a quick and reasonably inexpensive process. Such a valuation is almost invariably a non-speaking valuation, with the expert’s reasoning and calculations concealed behind the curtain. The court should give no encouragement to any attempt to infer, from ambiguous shadows and murmurs, what is happening behind the curtain.”

(3)   That said, and as appears from the actual result in the ex parte Holden case (whereby the applicant was permitted not to accedeto the acquisition of his shares at a value struck by an unspeaking expert), that does not conclude the point as to whether it is fair and reasonable to bind a claimant to such a process, especially in circumstances where the process is in substitution for other processes which would involve giving reasons (most obviously, in the case of a claim before the Court).

(4)   In this case, the balance is between, on the one hand, expedition and certainty, without the danger of collateral attack and the complication of reasons being required, and, on the other hand, a process more nearly replicating the existing right of access to the Court. 

(5)   I consider the balance struck to be to be fair and reasonable, and not vitiated by any supervening or over-riding principle of fairness. The overall purpose of the Scheme, supported by the majority, is to facilitate an expeditious return of the Surplus to creditors. If the Administrators were required to give detailed reasons for their decision, that objective might be thwarted. 

(6)   Further and in any event, the Scheme provides for a Consultation Period during which LBIE may engage in discussions with the certifying creditor regarding their certification. Mr Downs has said he envisages that, where the Consultation Period is engaged,

“the reasons for rejecting a certification will be discussed with a Certifying Creditor”.

(7)   In all the circumstances, I do not consider that the process is in this regard flawed or unfair.

“If the Company rejects a Certification Claim and the Certifying Creditor does not accept the Company’s decision, the Claim should be referred to one of the Adjudicators identified (acting as an expert). If none of those named is available, a replacement should be agreed between the Certifying Creditor and the Company, without reference to the Wentworth Group. Whilst the Adjudicator should uphold a Certifying Creditor’s claim unless made in bad faith or irrationally, the Adjudicator should not be obliged only to choose between, on the one hand, the amount certified and, on the other, the statutory minimum or the Company’s counter-offer. If the Adjudicator does not uphold the Certifying Creditor’s claim but considers that, on the evidence presented to the Adjudicator (including evidence requested by the Adjudicator), another sum would be appropriate, the Adjudicator should be free to award that other sum. The Adjudicator should also be free to hold an oral hearing if the Adjudicator considers it appropriate, and should give brief reasons for his or her decision.”

(1)   I do not think a Certifying Creditor could have any reasonable objection to the system for selecting an adjudicator. If none of the named adjudicators is available, a replacement must be appointed. The replacement must be a former judge or a QC. The Subordinated Creditor has a right of consultation, but the Administrators have the final decision as to the identity of the adjudicator (and will make that decision in accordance with their duties as officers of the Court). The system is calculated to ensure a high calibre of potential appointees, and is further buttressed by the Administrators’ duties as officers of the Court. My experience is that reserving to each Certifying Creditor the choice of adjudication in default of the three named would, in that event, be likely to lead to delay, quite unnecessarily. 

(2)   Borrowing from the explanation given in the Administrators’ skeleton argument, the key feature of an adjudication under the Scheme is that the adjudicator must either accept the creditor’s certification, accept LBIE’s counter-offer (if one has been made), or award the statutory minimum of 8% (if no counter-offer has been made). The purpose of this structure is twofold. On the one hand, it reduces the length and complexity of the adjudication (so as to promote the overall objective of distributing the Surplus expeditiously). On the other hand, the limited options available to the adjudicator are intended to reduce the risk of excessively high certifications. Creditors will understand that the adjudicator is unable to cure a defective certification by re-writing it, and therefore will take care to ensure that certifications are supported by proper evidence. Nevertheless, the adjudication casts the burden of proof in favour of the certifying creditor: the adjudicator must find in favour of the creditor unless LBIE proves that the certification was made in bad faith, irrationally or otherwise than in accordance with the Relevant Principles. 

“The Certifying Creditor should be able to take the matter to the court if the Adjudicator has made a manifest error, has made an error of law or has reached a conclusion that no reasonable Adjudicator could have reached.”

(1)   It should be noted first that the Scheme provides that “insofar as the law allows there will be no right of appeal against the Adjudicator’s decision (whether to a court or otherwise)”. Accordingly, the Scheme does not exclude any mandatory rights of appeal which may exist under the general law. 

(2)   The nature of the adjudication required needs to be borne in mind. In effect it it is simply to choose between the certification and the counter-offer or (if no counter-offer is made) the statutory minimum of 8%. That is not likely to give rise to a coherent and cogent claim of manifest error or Wednesbury unreasonableness. In such circumstances, the prescription of an appellate process seems more likely to engender more bitterness and expense, over matters that may well ultimately signify more sound and fury than prejudice.

(3)   The most obvious sort of dispute where instinct prompts against foreclosing recourse to Court is one involving a point of law. However, it seems unlikely that the Adjudicators will need to determine any point of law (and neither Deutsche nor SRM have suggested otherwise). The Relevant Principles provide the legal framework.

Part I: international jurisdiction and cross-border recognition

Recast Judgments Regulation

(1)   Article 1(1) provides that the Regulation applies to “civil and commercial matters, whatever the nature of the court or tribunal”, which is plainly broad enough to encompass schemes of arrangement;

(2)   The exclusion in article 1(2)(b) is intended simply to exclude proceedings which fall within the Insolvency Regulation, so as to dovetail the two Regulations and to avoid both any overlap and any gap between them; in Re Rodenstock Briggs J (as he then was) adopted this view in the case of schemes involving solvent companies, but left the matter open in the case of schemes relating to insolvent companies; and in Re Magyar David Richards J (as he then was) considered that 

“it logically follows that the exclusion in article 1(2)(b) does not extend to a scheme of arrangement involving an insolvent company, at least unless the company is the subject of an insolvency proceeding falling within the Insolvency Regulation. In other words, an order sanctioning a scheme between an insolvent company and creditors is subject to the Judgment Regulations,  at least if the company is not subject to insolvency proceedings to which the Insolvency Regulation applies.”

(3)   David Richards J went on to mention the case where (as here) a scheme company is subject to an insolvency proceeding, stating that it would not necessarily follow that the exclusion would apply, since a scheme of arrangement is not an insolvency proceeding to which the Insolvency Regulations applies, so that

“[i]t could still be that an order sanctioning a scheme of arrangement in those circumstances is entitled to recognition under the [the Recast Judgment

Regulation]”,

But he did not decide the point since it did not arise in the context.

“A person domiciled in a Member State may ... be sued ... (1) where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings”. 

“… if the Judgments Regulation applies because some of the creditors are to be regarded as defendants to the applications for sanction [of the scheme] then, where one of those defendants is domiciled in the United Kingdom, that gives the court jurisdiction under Article 6”.

(1)   Some of the Scheme Creditors (representing a very small proportion of the Scheme Creditors by value) are former employees of the Company domiciled outside the UK in other EU Member States (the “Relevant Employees”). Article 22(1)

provides: 

“An employer may bring proceedings only in the courts of the Member State in which the employee is domiciled.”

This raises a question as to whether Article 22(1) of the Recast Judgments Regulation prevents the Relevant Employees from being included in the Scheme, given that the Scheme seeks to compromise the Company’s liabilities under the relevant contracts of employment. It is arguable, by reference to its effect, that the Scheme should be characterised as a matter relating to employment within Article 22(1), even though the primary

purpose of the Scheme is to facilitate the distribution of statutory interest under the English insolvency regime.  

(2)   Some of the finance documents governing the scheme liabilities contain exclusive jurisdiction provisions in favour of the courts of another Member State. This raises a question as to whether Article 25(1) of the Recast Judgments Regulation prevents such creditors (the “Relevant Jurisdiction Clause Creditors”) from being included in the Scheme, given that the Scheme seeks to compromise the Company’s liabilities under the relevant finance documents. Article 25(1) provides: 

“If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise.”

It  may be open to doubt whether the Scheme can properly be treated as falling within a contractual jurisdiction clause for the purposes of Article 25(1), given that the primary purpose of the Scheme is to facilitate the distribution of statutory interest under the English insolvency regime. But the argument is there; and it must either be adjudicated or some other solution must be

identified. 

(1)   Article 26(1) refers to a defendant who “enters an appearance”. In determining whether an appearance has been entered, “it is for the lex fori to determine what constitutes an appearance”: see

ago. 

Cross-border effect and International recognition

“The court will not generally make any order which has no substantial effect and, before the court will sanction a scheme, it will need to be satisfied that the scheme will achieve its purpose.”

effectiveness, or certainty. Thus, it does not require that the Court must be satisfied that the scheme will be effective in every jurisdiction worldwide: its focus is on jurisdictions in which, by reason of the presence there of substantial assets to or because of which creditors might make claims, it is especially important that the scheme be effective. Further, and as Snowden J explained in Re Gansewinkel at

[71],

“The English court does not need certainty as to the position under foreign law – but it ought to have some credible evidence to the effect that it will not be acting in vain.”

“[17] My principal concern, when the application was first before me on 14th December 2006, was to understand the true impact, if any, of the proposed transfer on the business … What, if any, effect will the transfer have if proceedings against Sompo were brought in those jurisdictions where it did have substantial assets? Would the transfer be recognised in those jurisdictions? If not, what purpose would be served by the transfer?

[18]          It was relevant, therefore, to have some evidence as to the proportion of the transferred policies which were governed by English law or other UK law and, particularly if the proportion were small, to have some evidence as to the effect of the transfer in Japan and perhaps other jurisdictions where Sompo has substantial assets.

[19]          If it appeared that the transfer would have little or no significant effect, it raised an issue as to whether in its discretion the Court should sanction the transfer. It is established that, on comparable applications under the Companies Act 1985, the Court will not act in vain …

[26] Overall this evidence leaves me less than convinced that the scheme once sanctioned will definitely be effective as regards proceedings in foreign jurisdictions to enforce claims under policies which are governed by foreign law, although I acknowledge that it provides a proper basis for concluding that it may well be so effective in Japan and the United States. More importantly, as I have mentioned, the evidence establishes that over 27% of the policies in number and by reference to reserves are governed by English law, and it is reasonable to suppose that the transfer will be effective in any relevant jurisdictions as regards those policies. The proposed scheme will therefore achieve a substantial purpose. The fact that the scheme also extends to a larger class of business not governed by English law is not, in my judgment, a good ground for refusing to sanction the scheme. Whether the scheme is recognised as effective in Japan or the United States or elsewhere will, if necessary, be tested in due course in proceedings in those jurisdictions.”

English company under English law in any jurisdiction other than England, and only a small proportion of the Surplus is situated outside of England. 

effect. 

Part J: Conclusion