The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 24 of 1997

 

Charles W. Kempe Jr. and Nigel Hamilton (The Joint

Liquidators of Mentor Insurance Limited) Appellants

v.

Ambassador Insurance Company (in liquidation) Respondent

 

FROM

 

THE COURT OF APPEAL OF BERMUDA

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 19th November 1997

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Present at the hearing:-

Lord Steyn

Lord Hoffmann

Lord Cooke of Thorndon

Lord Saville

Mr. Justice Gault

  ·[Delivered by Lord Hoffmann]

 

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This appeal raises a question on the effect of a Scheme of Arrangement  under section 99 of the Bermuda Companies Act 1981, corresponding to section 425 of the U.K. Companies Act 1985.  The relevant subsections read as follows:-

"(1)  Where a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

 

 (2)  If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

(3)  An order made under subsection (2) shall have no effect until a copy of the order has been delivered to the Registrar for registration, and a copy of every such order shall be annexed to every copy of the memorandum of association of the company issued after the order has been made."

 

1. On 21st June 1985 Mentor Insurance Limited ("Mentor") was ordered to be wound up.  Mr. Kempe and Mr. Nigel Hamilton ("the liquidators") were appointed joint liquidators.  They gave notice under Rule 73 of the Companies (Winding-Up) Rules 1982 that proofs should be filed by 31st May 1989.  On the basis of these proofs, they declared an interim dividend of 25c in the dollar and paid out $78.2 million.  Despite the deadline, creditors in a liquidation are in principle entitled to file new or revised proofs at any time before the assets are finally distributed, subject only to not disturbing distributions which have already been made.  The liquidators took the view that if this rule was allowed to prevail, the liquidation was likely to go on for many years.  They therefore proposed a scheme of arrangement under section 99, the principal feature of which was to impose a strict deadline for filing claims, after which creditors would be altogether barred from participating in the liquidation.

The Scheme defined a "Scheme Claim" as any non-preferential claim provable in the liquidation.  It prescribed a "Final Filing Deadline", which in the event was 30th June 1993 and provided in clause 2.1.2 that:-

"No Scheme Claim in respect of which a Claim Form has not been duly lodged shall be entitled to rank for any dividend payable under the Scheme unless, on or before the Final Filing Deadline, a Notice of Claim in respect of such Scheme Claim shall have been submitted to the Joint Liquidators in accordance with clause 2.1.3."

 

2. Clause 2.1.3 prescribed a form of Notice of Claim and said that it "MUST, on or before the Final Filing Deadline" be submitted to the Joint Liquidators.

 

3. Clause 2.2 dealt with the assessment of claims by the liquidators.  By clause 2.2.1 they were to determine the reasonableness of Scheme Claims and reject them to the extent which they considered unreasonable.  If they rejected a claim, a written statement of the reasons was to be sent to the creditor within 21 days of such rejection.  Section 2.3 dealt with appeals from the rejection of a claim by the liquidators.  The first two subclauses read as follows:-

"2.3.1Any Scheme Creditor which receives a written statement in accordance with clause 2.2.1 may apply to the Court in the manner provided by the Rules for an order that any decision of the Joint Liquidators relating to the assessment of that Scheme Creditor's claim be reversed or varied, but only on the ground that such decision was unreasonable.  Such application must be made by a summons filed with the Court within 21 days of the Scheme Creditor receiving the written statement mentioned in clause 2.2.1. ...

2.3.2Save as provided in the Scheme, no Scheme Creditor shall have any right to appeal any decision of the Joint Liquidators relating to the assessment of Scheme Claims including, for the avoidance of doubt, any right to apply to the Court under rule 77 of the Rules."

 

4. Clause 2.4.1 dealt with Rejected Claims:-

"2.4.1Each Scheme Creditor having a Scheme Claim or portion thereof which is rejected in whole or in part by the Joint Liquidators pursuant to clause 2.2.1 shall, unless a summons is filed in accordance with clause 2.3.1, have no further right to participate in the Scheme, to the extent of the rejection."

 

5. Finally, clause 8.1.1 provided that Mentor should continue to be a company in liquidation and that "subject to the terms of the Scheme" the liquidation should be governed by the principles and procedures applicable to liquidations in Bermuda.

 

6. Ambassador Insurance Company ("Ambassador") filed a Notice of Claim on 25th June 1993, within the Final Filing Deadline, in the sum of $1,158,140.27.  The liquidators rejected all but $79,075.24 and delivered a written statement of reasons in accordance with clause 2.2.1 on 17th November 1994.  The time for appealing under clause 2.3.1 expired on 8th December 1994.  Owing to an administrative lapse in its offices, Ambassador did not file a summons until 16th December.  The summons sought an order that the time for appealing be enlarged pursuant to Rule 75 of the Companies (Winding-Up) Rules 1982 or the inherent jurisdiction of the court.

 

7. Ground J. held that neither Rule 75 nor the inherent jurisdiction had any application to appeals under the scheme.  He struck out the summons on the ground that the court had no jurisdiction to entertain it.  The Court of Appeal reversed his decision and enlarged the time for appealing.  Against this decision the liquidators appeal to Her Majesty in Council.

 

8. Rule 157 provides as follows:-

"The Court may, in any case in which it shall see fit, extend or abridge the time appointed by these Rules or fixed by any order of the Court for doing any act or taking any proceeding."

 

9. The time for appealing under clause 2.3.1 is plainly not "appointed by these Rules".  It is appointed by the Scheme, even though it happens to be the same 21 day period as a creditor is given under Rule 75 for applying to reverse or vary the decision of a liquidator rejecting his proof in the liquidation.  Mr. Crystal Q.C., who appeared for Ambassador, submitted that the Rules should be regarded as operating alongside the Scheme.  He gave two alternative reasons.  One was that they had been incorporated in the Scheme by the provision in clause 2.3.1 that the Scheme Creditor should apply to the Court "in the manner provided by the Rules".  The other was that the effect of clause 8.1.1 was to leave the Rules in operation except so far as expressly excluded. An example of express exclusion was clause 2.3.2, which said that no Scheme Creditor should have any right to apply to expunge another creditor's proof under Rule 77.  On the other hand, Rule 2.2.3 contemplated that the liquidator would have the right to invoke Rule 76 to apply to expunge the proof of a creditor which he considered to have been improperly admitted.

 

10. Their Lordships are unable to accept either of these arguments.  The requirement that the application should be "in the manner provided by the Rules" means only that the form of application should be in accordance with the Rules.  It cannot mean that the application should be treated as if it was for all purposes an application to vary or reverse the decision of a liquidator under Rule 75.  Their Lordships note that although clause 2.3.1 is based upon Rule 75, the period of 21 days prescribed by the Rule is expressly said to be "subject to the power of the Court to extend the time". There are no such words in clause 2.3.1 and their Lordships consider that the omission must have been deliberate.  As for the other way in which the argument has been put, their Lordships express no view on whether there are provisions of the Rules which the Scheme has not excluded.  But for the reasons already stated, they consider that clause 2.3.1 deals exhaustively with the right of appeal and cannot be assimilated to Rule 75.

 

11. Since the period in clause 2.3.1 has not been "appointed by the Rules", the next question is whether it has been "fixed by any order of the Court".  On the answer to this question depends not only whether the Court can act under Rule 157 but also whether it has inherent jurisdiction to do so, the latter being, as Lord Denning M.R. said in R. v. Bloomsbury and Marylebone County Court, ex parte Villerwest Ltd. [1976] 1 W.L.R. 362, 365, a power "to enlarge any time which a judge has ordered".  Is the period of 21 days in clause 2.3.1 a time which was ordered by the Chief Justice when he approved the Scheme?  In the Court of Appeal, Kempster J.A. thought that it was.  He said that the clauses of the Scheme would have been "without effect" but for the order of the Chief Justice giving the sanction of the Court on 23rd March 1993 and the subsequent delivery of that order to the Registrar.  Although the case was not cited to him, his view has the support of the decision of the Supreme Court of Western Australia in Caratti v. Hillman [1974] W.A.R. 92.  Jackson C.J. said at page 94 that the scheme was "an integral part of the court's order" and Burt J. said at page 95 that "the rights [under the Scheme] are ... in my opinion created by the order and the procedure whereby those rights are to be established or ascertained is a procedure which is also created by the order".  Accordingly, the court could extend any period prescribed by the Scheme under its power to extend periods fixed by its  orders.  The case has since been followed at first instance

in Australia and in Bond Corporation Holdings Ltd. v. State of Western Australia (No. 2) (1992) W.A.R. 61 Anderson J. said at page 68 its reasoning was that "once the order is made, it is the order, `speaking in terms of the scheme' (per Burt J. in Caratti, p. 95) that has effect, not the resolution of the creditors and not the statute".

 

12. Their Lordships respectfully disagree.  It is true that the sanction of the court is necessary for the Scheme to become binding and that it takes effect when the order expressing that sanction is delivered to the Registrar.  But this is not enough to enable one to say that the court (rather than the liquidators who proposed the scheme or the creditors who agreed to it) has by its order made the scheme.  It is rather like saying that because Royal Assent is required for an Act of Parliament, a statute is an expression of the Royal will.  Under section 99 it is for the liquidators to propose the scheme, for the creditors by the necessary majority to agree to it and for the court to sanction it.  It is the statute which gives binding force to the Scheme when there has been a combination of these three acts, just as the rules of the constitution give validity to acts duly passed by the Queen in Parliament: see In re Garner's Motors [1937] Ch. 594, 598-599; Devi v. People's Bank of Northern India Ltd. [1938] 4 All E.R. 337, 343.

 

13. It is of course true that the sanction of the court is by no means a formality.  Furthermore, in giving its sanction, the court has an inherent jurisdiction to correct any obvious mistakes in the document which sets out the scheme.  But it cannot alter the substance of the scheme and impose upon the creditors an arrangement to which they did not agree.  The question of whether the time limits in the scheme are fixed or flexible is in their Lordships' opinion one of substance.  Mr. Crystal accepts that if there is jurisdiction to enlarge the period for filing an appeal against the rejection of a claim, there must also have been jurisdiction to extend the Final Filing Date for filing the original claims.  But their Lordships think that this would have been a material alteration, detracting from the certainty and expedition which were the chief objects of the Scheme.  If creditors felt that in providing fixed time limits the Scheme was creating traps into which the unwary might fall, the time to raise this question was when the Scheme was under consideration or by way of objection when the Court was asked to give its sanction.

 

14. Their Lordships are therefore in full agreement with the careful judgment of Ground J.  They will humbly advise Her Majesty to allow the appeal and restore his order striking out Ambassador's summons.  Ambassador must pay the liquidators' costs in the Court of Appeal and before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.