Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 2
P1277/10	OPINION OF LORD GLENNIE in the PETITION of ROYAL SCOTTISH ASSURANCE PLC for confirmation of a reduction of capital ___________

Noters: Munro, Dundas & Wilson

30 December 2010

[1] The petitioner ("the Company") was formed on 30 August 1989 as a vehicle for a joint venture between The Royal Bank of Scotland Group plc ("the Bank") and The Scottish Equitable Life Assurance Society Limited ("Scottish Equitable"). Originally incorporated as a private company limited by shares, it re-registered as a public company on 10 November 1989. When the joint venture between the Bank and Scottish Equitable terminated, the Company became a vehicle for a joint venture between the Bank and Scottish Widows Fund Life Assurance Society ("Scottish Widows"); and in 2000, when that joint venture was itself terminated, it became a vehicle for a new joint venture between the Bank and Aviva plc ("Aviva"). In broad terms, the joint venture involves the use of the Bank's distribution network to market Aviva products, with both parties sharing the profits of the business.

[2] The shareholding in the Company reflects the joint venture between the Bank and Aviva. The authorised share capital of the Company is 172,000,000 ordinary shares of £1 each, of which 148,200,000 are issued and fully paid up. Apart from one share which is held by a nominee company, all the shares in the Company are held by RBS Life Investments Limited ("RBS Life"), which is itself owned as to 50.001% by RBS Life Holdings Limited ("RBSLH"), a subsidiary of the Bank, and as to 49.999% by Aviva Life (RBS) JV Limited ("Aviva Life JV"), a subsidiary of Aviva.

[3] The Bank and Aviva have decided to enter into a new arrangement whereby Aviva will manufacture a range of protection and pension products for distribution by the Bank, and the Bank will receive all the profits from the distribution of these products while also manufacturing and distributing its own investment products. The present joint venture is expected to terminate and be replaced by the new arrangement on 31 December 2010.

[4] The present application is for confirmation of the reduction by £90 million of the Company's share capital. It is stated in the Petition that the Company is overcapitalised. It therefore proposes to return capital to RBS Life and, thereby, to the joint venture partners. The mechanism is straightforward: if approved by the court, the reduction will give rise to a reserve on the books of the Company, which reserve will form part of the Company's realised profits and permit the Company to pay a dividend to RBS Life, which will then be in a position to pay a dividend to its shareholders, RBSLH and Aviva Life JV. The effect of the reduction will be to reduce the paid-up share capital of the Company to £58.2 million, made up of 58,200,000 shares of £1 each.

[5] The application came before the court on 23 November 2010, when a "first order" was granted, ordering intimation on the Walls and advertisement in the Edinburgh Gazette, the Scotsman and the Times; laying down a timetable for answers to be lodged by anyone opposing the petition; remitting the process to a Reporter, Mr Livingstone, to report on the facts and circumstances set out in the Petition and on the regularity of the proceedings; and appointing the case to call for a final hearing on 22 December 2010. The Reporter duly reported in a Report dated 21 December 2010. I am grateful to him for the care taken in that Report and for his assistance generally. Part of the order sought by the Company is a direction in terms of s.645(3) of the Companies Act 2006 that s.646 of that Act, which requires the court to settle a list of creditors entitled to object to the reduction of capital, does not apply as regards the creditors of the Company or any class of them. At the hearing on 22 December 2010, I raised certain concerns about whether the information before the court was sufficient to enable the court to make the order sought and continued consideration of the case, principally so that I could discuss it with the Reporter and consider whether I should require formal approval from the Financial Services Authority ("the FSA") before granting the order sought and confirming the reduction. In the event, having consulted the Reporter and having given the matter such further consideration as I considered necessary, I was satisfied on the material before the court that the order could properly be made. I therefore granted it without a further hearing. My reasons are set out below.

[6] The relevant statutory framework is to be found in ss.645-649 of the Companies Act 2006 as amended. S.645(1) provides that where a company has passed a resolution for reducing its share capital, it may apply to the court for an order confirming the reduction. The company has passed such a resolution and this is that application. S.645(2) provides that in certain circumstances, which pertain here, s.646 applies unless the court directs otherwise. S.645(3) entitles the court to direct that s.646 is not to apply as regards any class or classes of creditors. Ss.646 and 648 are, so far as is material, in the following terms:

"646 Creditors entitled to object to reduction

(1) Where this section applies ... every creditor of the company who -

(a) at the date fixed by the court is entitled to any debt or claim that, if that date were the commencement of the winding up of the company would be admissible in proof against the company, and

(b) can show that there is a real likelihood that the reduction would result in the company being unable to discharge his debt or claim when it fell due,

is entitled to object to the reduction of capital.

(2) The court shall settle a list of creditors entitled to object.

(3) For that purpose the court -

(a) shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and

(b) may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction of capital.

(4) If any creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of that creditor on the company securing payment of his debt or claim.

(5) ...

648 Court order confirming reduction

(1) The court may make an order confirming the reduction of capital on such terms and conditions as it thinks fit.

(2) The court must not confirm the reduction unless it is satisfied, with respect to every creditor of the company who is entitled to object to the reduction of capital that either -

(a) his consent to the reduction has been obtained, or

(b) his debt or claim has been discharged, or has determined or has been secured.

(3) ...

(4) ..."

S.649 makes provision for the order confirming the reduction of a company's share capital to be registered.

[7] S.646(1) was amended by Reg.3 of the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009. The current wording, set out above, took effect from 1 October 2009. The change made by the amendment was the introduction of s.646(1)(b). The significance of the amendment is that it limits the creditors of the company who are entitled to object to a reduction in capital to those who can show that there is a "real likelihood" that the reduction, if confirmed, would result in the company being unable to discharge their debts or claims when they fell due. This is a high test which a creditor is likely to find it difficult to overcome.

[8] In order to settle a list of creditors entitled to object, the court is required to ascertain, so far as possible without requiring an application from any creditor, the names of such creditors and the nature and amount of their debts or claims. In practice, however, upon it being demonstrated to the satisfaction of the court that there are no creditors whose protection requires a list of creditors to be settled, the court dispenses with the requirement to settle a list. This has become the norm. I am informed that no list of creditors has been settled under this section or its predecessors either in Scotland or in England since 1949. The requirement for a list of creditors has always been disapplied. What happens in practice is that the court makes an assessment of the nature and amount of debts and claims outstanding at the date of the application for confirmation of the reduction; and forms a view as to the risk, if any, that the reduction in capital might result in prejudice to some or all of those creditors. In general terms, it has become the practice of the Court of Session in Scotland and, as I understand it, also of the Companies Court in London, to dispense with settlement of a list of creditors if the court can be satisfied that there is no realistic possibility of any creditor being put at risk by the reduction (by a consideration of the value of the company's realisable assets, or a variant of that approach: c.f. Re Martin Currie Ltd. 2006 CSOH 17) or if one or more of certain accepted methods of creditor protection are adopted. The principal methods are: (a) obtaining the consent of creditors and, where only some of the creditors consent, subordinating the claims of consenting creditors to those of non-consenting creditors; (b) setting aside cash in a blocked account in an amount sufficient to discharge the claims of non-consenting creditors; (c) the provision by a bank or other third party with a sound credit covenant of a guarantee in an amount sufficient to cover the claims of non-consenting creditors; and (d) the giving of an appropriately worded undertaking, the effect of which is to ensure that any distribution consequent upon the reduction being confirmed by the court does not reduce the net assets of the company below a figure sufficient to ensure that the claims of non-consenting creditors will be paid as they fall due. No doubt other methods have been used from time to time.

[9] The restriction brought in by the amendment of s.646(1)(b) on the category of creditors entitled to object has not resulted, in Scotland at least, in an alteration of that practice. In applications to the court for confirmation of a reduction of capital, it has remained the norm for an undertaking or the like to be volunteered. However, it is not proposed to seek the consent of the creditors in this case, since that would give rise to significant practical difficulties. Nor is any undertaking offered in this case. There are two reasons for this. First, the intention behind the reduction is to create a reserve available for immediate distribution. Any undertaking would cut across this, though as the Reporter points out in para.10.5 of his Report, the existing distributable profits are sufficient to enable a substantial dividend to be paid even without confirmation of the reduction. Secondly, however, the nature of the claims is such as to make a guarantee or undertaking impracticable. In the usual case of a manufacturing or trading company, an assessment can be made of the debts or claims outstanding at the date of the application for confirmation, and the guarantee or undertaking can be framed in the certain knowledge that the debts or claims will accrue due within a fixed period (usually a few years at most). But in the present case the creditors are, in the main, life insurance policy holders and holders of pension policies. In many cases, nothing will be payable under such policies for twenty to thirty years, perhaps longer. No guarantee from a third party is likely to be available and any undertaking, if framed in terms which covered existing policy holders, would prevent entirely any distribution. As the Reporter notes in para.7.9 of his Report, there are features of companies whose business is the provision of life, investment and pensions products which distinguish those companies in some respects from most other commercial companies.

[10] I was not referred to any instance of a reduction of capital being confirmed by the court where the existing creditors fell into the category of life assurance or pension policy holders, without any guarantee or undertaking having been offered and without the creditors having been specifically given the opportunity to indicate their consent or otherwise to the proposal. There have been reductions in share capital of insurance companies which have been approved by the court as part of a scheme of arrangement, but in such cases the scheme has necessitated that there has been full notification to creditors. In the present case there has been advertisement of the Petition, but that cannot realistically be equated with full notification. I think it safe to assume that most creditors will be unaware of the proposed reduction.

[11] In those circumstances, the court is required to form a view as to whether there is any realistic possibility that any creditors of the Company will be able to show that there is a real likelihood that the reduction, if confirmed, would result in the Company being unable to discharge their debts or claims when they fell due. If there is such a possibility, then the court should endeavour to protect the right of those creditors to object; and, failing their informed consent being obtained, or some mechanism being put in place for their protection, should at least consider settling a list of creditors in accordance with s.646(2).

[12] I was referred by Ms Munro, who appeared for the Company and for whose assistance I should record my gratitude, to the decision of Norris J in Re Liberty International plc [2010] EWHC 1060. In that case Norris J emphasised that, where capital is reduced, the court is always concerned to see that the position of creditors is safeguarded. He commented that while the precise nature of the safeguard which will satisfy the court has evolved over time, the range of possibilities was well settled. He pointed out, however, that the nature of the safeguarding exercise itself had been altered by the Companies Act 2006 to which I have referred. It was relevant to note that by s.642 of the Act a private company limited by shares might now reduce its share capital if the resolution for reduction is supported by a solvency statement complying with s.643. In such a case, the sanction of the court is not required. But the court's sanction was still required for other companies. In terms of s.648, objecting creditors have to be paid or secured. It was therefore essential to identify every creditor of the company who was entitled to object. S.646(1) defined the category of creditors who were entitled to object. Read short, a creditor was only entitled to object if (a) at, the relevant date, his claim, if that date were the date of the commencement of the winding up of the company, would be admissible in proof against the company, and (b) he "can show that there is a real likelihood that the reduction would result in the company being unable to discharge his debt or claim when it fell due". I am not here concerned with (a). It was accepted by Ms Munro that the various policyholders satisfied the requirements there laid down. I am, however, concerned with (b). As to this, Norris J made the following remarks which I consider helpful and which I shall therefore set out in full.

"16 The test imposed by the statute is "a real likelihood", and it is undesirable to put any gloss upon those words. But equally it is unhelpful simply to say that I share the view of Mr Registrar Nicholls that, having regard to the terms of the intended demerger in the instant case, no creditor could satisfy that test and accordingly a list of creditors was properly dispensed with.

17 Where the section calls upon a creditor to show "a real likelihood" that the reduction "would" result in an inability to discharge the debt when it becomes due, it is calling upon the creditor to demonstrate a particular present assessment about a future state of affairs. In considering the evidence I identified three elements: what follows is descriptive of the course I followed, not prescriptive as a course to be adopted by others.

18 First, I looked at the factual: whatever assessment is made has to be well grounded in the facts as they are now known. Although one is looking to the future one has to avoid the purely speculative.

19 Second, there is a temporal element. One is looking forward for a period in relation to which it is sensible to make predictions. That period will, of course, be affected by the nature and duration of the liability in question. So a continuing direct liability under a lease may indicate that a correspondingly long term view must be taken. But in general the more remote in time the contemplated event that will make payment fall due the more difficult it must be to establish the reality of the likelihood that the return of capital will itself result in inability to discharge the debt. For private companies directors are required to look forward for twelve months. I do not suggest that implicitly the same period applies where the sanction of the court is necessary: but I do consider that in any given case there will be a natural temporal boundary beyond which sensible assessment of likelihood is not possible.

20 Third, the section obviously does not require a creditor to prove that a future event will happen: it is concerned to evaluate the chance of the event (the company's inability to discharge the debt because it has returned capital). It describes the chance as "real likelihood", thereby requiring the objecting creditor to go some way up the probability scale, beyond the merely possible, but short of the probable. That is the "degree of persuasion" (as it was put by Hoffman J in re Harris Simons Construction Limited [1989] BCLC 202 at 204 F to H) for which I have looked in assessing the evidence."

While recognising the disclaimer of any intent to be prescriptive, I consider that this judgment provides a helpful approach which is likely to be applicable in the majority of cases. I agree with the emphasis of the need to avoid the purely speculative. I also agree that s.646(1)(b) is concerned to evaluate the chance ("beyond the merely possible, but short of the probable") of the company's inability to discharge the debt because of the reduction of capital. I stress those words, because it is the causative link between the reduction of capital and the company's perceived future inability to discharge the debt which is crucial. An objecting creditor, i.e. a creditor who seeks to show that he is entitled to object, must establish a "real likelihood" (i) that the company will be unable to pay his claim when it falls due for payment at some time in the future and (ii) that that inability to pay his claim at that time in the future will result from the reduction of capital now. Of particular relevance in this context is what Norris J calls (in para.19) the "temporal element". In general, as he points out, the more remote in time the occurrence of the contemplated event that will make payment fall due, the more difficult it must be to establish a "real likelihood" that the company's inability to make the payment and discharge the debt (assuming that there is then some default, the chance of which has to be evaluated to the same standard) has been caused by the return of capital. I emphasise again that the test of entitlement to object is that it is the reduction of capital, as opposed to some other future event, which may result in the company's inability to discharge the debt.

[13] In this case, therefore, I have to consider whether there is any realistic prospect that a policy holder wishing to object to the reduction of capital could show a real likelihood that the return of capital consequent upon the reduction will result in an inability on the part of the Company to meet its obligations. And I bear in mind that the claims of many of the creditors, who are long-term life assurance or pension policy holders, may not accrue due for many years from now.

[14] I start by considering the Company's latest audited accounts. These show that in the year ended 31 December 2009, the Company's total assets were valued at the something over £1.4 billion whereas its total liabilities (including "gross insurance liabilities", the meaning of which appears from para.[18] below) were valued at under £1.2 billion, a surplus of assets over liabilities of over £230 million. Consolidated management accounts setting out the Company's financial position as at 31 October 2010 show an increase in both assets and liabilities, with the surplus of assets over liabilities having risen to about £260 million. In each case, about 75% of the figure for the Company's total liabilities is attributable to long-term insurance liabilities, including liabilities under investment contracts.

[15] Such figures, though showing a healthy financial position for the Company, and therefore providing some comfort for policyholders whose claims may fall due within the next year or two, of themselves do little to provide any assurance for policyholders whose entitlement may only accrue some 20 or more years in the future. It may, of course, be said, against the background of these figures, that any policyholder will find it well nigh impossible to establish a "real likelihood" that his future claims will not be met, let alone that the putative failure to meet these claims could be linked causatively to the proposed present reduction of capital of £90 million. However, the Company has not sought to rest its case on this basis. In the Petition it has set out in some detail the regulatory position under which it carries on business. The Reporter has confirmed the accuracy of the matters narrated in the Petition and has added his comments. I summarise below the regulatory position.

[16] The Company is authorised and regulated by the FSA under and in accordance with the Financial Services and Markets Act 2000 ("FSMA"). It holds a permission granted by the FSA under Part IV of FSMA to effect contracts of long-term insurance business in the United Kingdom of classes I, III and IV set out in Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. As a regulated entity carrying on long-term insurance business in the UK, the Company is subject to a regulatory regime operated by the FSA which, in the exercise of its rule-making powers under FSMA, promulgates rules and guidance applicable to regulated entities ("the FSA Rules"). These are set out in The FSA Handbook, as updated from time to time. They include a statement of general principles defining the fundamental obligations of firms under the regulatory system, including the obligation to maintain adequate financial resources and the obligation to pay due regard to the interests of customers and to treat them fairly. So far as concerns entities in the position of the Company, the content of the obligation to maintain adequate financial resources is more fully explained in The General Prudential Sourcebook for Banks, Building Societies, Insurers and Investment Firms ("GENPRU") and The Prudential Sourcebook for Insurers ("INSPRU"). As the Reporter explains in para.8.3 of his Report, long-term insurance business has certain features which distinguish it from most other commercial businesses: many of its liabilities are long-term and contingent; those liabilities require to be valued by reference to complex actuarial formulae; and regulation requires that those liabilities be supported by the holding of assets of a certain type and quality. The content and format, and the bases of preparation, of the financial statements of companies which carry on this type of business reflect those distinguishing features.

[17] Under the FSA regulatory regime, a firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate both as to amount and quality to ensure that there is no significant risk that its liabilities (including prospective and contingent liabilities) cannot be met as they fall due: GENPRU, 1.2.26R. In particular, it must at all times maintain capital resources equal to or in excess of its "capital resources requirement" ("CRR"): GENPRU, 2.1.13R. That is known as the "Pillar 1 Requirement". The adequacy of a firm's capital resources is assessed both by the firm itself and by the FSA. All firms are required to submit returns to the FSA ("the FSA Return") to enable this to be done. The Company's most recent FSA Return, dated 31 December 2009, shows that as at that date the Company's CRR, or Pillar 1 Requirement, was slightly in excess of £44 million. This means that the Company is required to maintain capital resources equal to or greater than that amount. Different types of capital offer differing degrees of protection to the firm and to its customers. Accordingly, restrictions are placed on the extent to which particular types of capital may be included in the computation of a firm's capital resources. Put shortly, the capital resources of a firm fall into two categories, or tiers, which are themselves sub-divided. At least 50% of an insurer's "tier one" capital resources must be accounted for by "core tier one capital", namely capital which provides maximum loss absorbency on a going concern basis to protect the firm from insolvency. It includes permanent share capital, defined to include fully-paid ordinary shares, the firm's profit and loss account, and other reserves: see generally GENPRU 2.2.62R-2.2.64R and 2.2.83R-2.2.84G.

[18] These general prudential standards set out in GENPRU are amplified in the case of insurers by INSPRU. INSPRU has the aim of reducing the risk that a firm may fail to meet its liabilities to its policyholders as a result of "insurance risk", namely the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. It requires a firm to establish "technical provisions" adequate to meet its liabilities to its policyholders. These provisions appear on the firm's balance sheet (and are shown in the Accounts under the heading "gross insurance liabilities"). INSPRU reiterates the requirement to hold assets of a value sufficient to cover all liabilities, including technical provisions, and to ensure suitable matching of assets to liabilities: INSPRU 1.1.17G-1.1.18G. Guidance on the approach to valuation of assets and liabilities for these purposes is contained in INSPRU 7.1.36G-7.1.41G, and the terms of that guidance are reflected both in the FSA Return and in the company's Accounts.

[19] On these aspects, the Reporter adds the following points. First, he notes that in valuing an insurer's insurance-related liabilities (i.e. its "technical reserves") for the purposes of determining the amount of capital required to be held to support those liabilities, insurers are required, in respect of those liabilities which have not yet fallen due for payment (its "mathematical reserves"), to include an appropriate margin for adverse deviations in the actuarial assumptions used. The calculations therefore build in additional prudence. Second, he points out that the FSA Rules make provision for the management of liquidity risk (i.e. the risk that an insurer, although technically solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost) by requiring an insurer, amongst other things, to document its policy for managing liquidity risk, and by providing its own detailed guidance to amplify the rules set out in INSPRU in their application to liquidity risk. Third, he explains that the FSA Rules are based on the proposition that all insurers are required to have the capital resources believed to be needed to give it a 99.5% confidence that all insurance liabilities could be met over a one-year timescale: INSPRU 7.1.42R. The FSA has laid down an individual capital assessment ("ICA") process which involves the insurer identifying all the risks to which it is exposed, and using stress and scenario testing to measure the impact of those risks and thereby to calculate the capital required to be held in respect of those risks .INSPRU 7. Where the FSA believes that a firm's ICA assessment is insufficient, it can impose its own assessment of the capital requirements by way of individual capital guidance ("ICG"). The outcome of this process, in terms of the amount of capital required to be held, is usually referred to as the "Pillar 2 Requirement". Fourth, the effect of the FSA Rules is that an insurer cannot (a) transfer any assets out of its long-term insurance fund unless those assets represent an established surplus, or (b) pay a dividend to its shareholders unless, following payment, (i) there is no significant risk that its liabilities will not be met as they fall due and (ii) it continues to hold capital resources equal to or in excess of the higher of the Pillar 1 Requirement and the Pillar 2 Requirement. The Reporter expresses his view that, where an insurer is affecting a capital reduction and is not offering to provide one of the methods of creditor protection described in para.[8] above, the need for an insurer to comply at all times with the FSA Rules, and in particular its rules on adequacy of capital resources, is likely to provide a much more sophisticated and reliable test of its ability to meet its debts as and when they fall due than the traditional "realisable assets" test. I should add that the fourth point made by the Reporter, namely that the insurer cannot pay a dividend which would result in its capital resources falling below its Pillar 1 and Pillar 2 Requirements, appears to provide at least as much protection to a creditor as would traditionally have been given by the sort of undertaking referred to in para.[8] above.

[20] As already noted, the Company's audited Accounts for the year ended 31 December 2009 show that the Company's assets exceeded its liabilities by over £230 million. Those liabilities included the "gross insurance liabilities" which reflect the "technical provisions" required to be established by INSPRU. In addition, the Company's FSA Return shows that its core tier one capital resources computed in accordance with GENPRU exceed its CRR, or Pillar 1 Requirement, by an amount in excess of £123 million (i.e. they are nearly four times the amount required by GENPRU). It is pointed out in the Petition that the proposed reduction of capital of £90 million will reduce the Company's paid-up share capital to £58.2 million, still well in excess of the Company's CRR, even without having regard to the other matters which may be brought into account for the purposes of computing the Company's capital resources for this purpose.

[21] As indicated earlier in this Opinion, I considered whether I ought before confirming the reduction in capital to be satisfied that the FSA had no objection to the proposal. As I understand it, the Reporter also took the view that it would be advisable for the FSA to be asked whether they had any objection. To this end, the Company wrote to the FSA on 15 December 2010 specifically asking whether they had any objection. That was only a week before the hearing and, unsurprisingly, no answer had been received by the time of the hearing. Having made further enquiries of the Company's solicitors, however, the Reporter relayed to me the information that the letter of 15 December 2010 was likely to have been only the formal notification to the FSA, as required by the FSA's Supervision Manual, following on from informal discussions over the previous months. The Reporter confirmed that that explanation was consistent with his experience. Had the FSA had any particular difficulties with the proposed reduction of capital, they would have made it clear by now. Given the regulatory system, it is difficult to conceive of any opposition to the reduction in capital provided that any distribution following thereon was consistent with its guidelines. In those circumstances, I am persuaded that nothing is to be gained by me deferring my decision until receipt of an answer from the FSA to the letter of 15 December 2010.

[22] In all the circumstances, and having regard to the Company's financial position as shown in its Accounts, to the regulatory regime imposed by the FSA and to the fact that the Company appears to satisfy the requirements of that regime by a significant margin, and having regard also to the view of the Reporter that the FSA regulatory regime is likely to provide a more sophisticated and reliable test of a Company's ability to meet its debts as and when they fall due than the realisable assets test often used in the past, I can see no realistic possibility that any creditor would be able to persuade the court that there was a "real likelihood" that, if the reduction of capital was confirmed and a distribution made as proposed, that return of capital would result in the company being unable to discharge its debts. Many of the creditors are holders of long-term life assurance policies or other long-term policies. Their claims are not due for payment for many years. In so far as the sophisticated regulatory regime which I have described, with its actuarial assumptions and its margin of safety, may not provide an absolute assurance that all debts will be met as they fall due forever into the future, it is difficult to envisage that any disappointed creditor in, say, 20 years time would ever be able to mount an arguable case that the failure to pay his debt at that time could be attributed as a matter of causation to the return of £90 million capital to the shareholders some 20 years previously. That is the importance, to my mind, of the "temporal factor" referred to by Norris J in Re Liberty. It must be borne in mind that by the amendment to s.646(1) of the Act, Parliament has placed the burden firmly on the creditor to show a real likelihood that he will be prejudiced by the reduction of capital. My conclusions mean that there are no creditors "entitled to object" and there is therefore nothing to be gained by settling a list of creditors entitled to object.

[23] Although the question of whether there are creditors who are entitled to object in terms of s.646(1) is, in one sense, only a threshold to be crossed, I do not think that, by the exercise of its undoubted discretion, the court should seek to restrict the right of a Company to have a resolution for reduction of capital confirmed by the court in circumstances where Parliament has deliberately restricted a creditor's right to object. If there is no real possibility of any creditor establishing a "real likelihood" of prejudice in the manner specified in s.646(1)(b), then in the ordinary course I would expect an order for confirmation of the reduction to follow.

[24] For those reasons I made the order in the terms sought.