Cape Plc and Others v the Companies Act 1985
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE DAVID RICHARDS,Mr Justice David Richards |
| Judgment Date | 16 June 2006 |
| Neutral Citation | [2006] EWHC 1446 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: 3803 (AND OTHERS) OF 2005 |
| Date | 16 June 2006 |
[2006] EWHC 1446 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Mr Justice David Richards
Case No: 3803 (AND OTHERS) OF 2005
Sir Thomas Stockdale (instructed by Travers Smith) for Cape Plc and the other applicant companies
Hearing date: 7 June 2006
Approved Judgment
The Honourable
These are applications by Cape plc (Cape) and thirteen subsidiaries for an order sanctioning a scheme of arrangement under section 425 of the Companies Act 1985 between each company and its creditors with present or future asbestos-related claims. They are not opposed. On 9 June 2006 I sanctioned the scheme as regards all the companies with one exception and I give my reasons in this judgment.
In a judgment ( [2006] EWHC 1316 (Ch)) given on the application to convene the meetings of creditors, I described the background to the proposed schemes, the nature of the claims involved, and the provisions of the scheme and the agreements and other documents (the ancillary documents) to be executed or adopted in accordance with its terms: paras 1–9, 19–22, 28–30.
I will not repeat the detail set out in my earlier judgment. It is, however, worth reiterating that Cape and its subsidiaries (the Cape group), unlike some other former manufacturers and distributors of asbestos products, are solvent. The purpose of the scheme is to protect the present and future businesses of the scheme companies, to the mutual benefit, as the companies submit, of the companies and their asbestos-related claimants. This is to be achieved by, on the one hand, providing for the payment of claims by a newly-formed subsidiary of Cape (CCS) and prohibiting their enforcement against the scheme companies and, on the other hand, by providing for the funding of CCS by Cape out of available resources. Initial funding of £40 million will be provided to CCS, which has been raised by Cape through a share issue and borrowing. It is anticipated that this will be sufficient to cover claims over the next eight years. Thereafter, further funding will be provided in accordance with and subject to the terms of the ancillary documents, as described in paragraph 20 of my earlier judgment. Asbestos-related claims for death and personal injuries are likely to continue to emerge over the next 40 to 50 years.
The reasons for the scheme and its purpose are described by the chairman of Cape in a letter sent to the creditors:
"Claims against the Scheme Companies will continue for the foreseeable future. It remains very difficult to predict with any certainty what the levels of these claims will be, when they will arise and the financial consequences of these claims on the continued solvency of the Scheme Companies. It is therefore important that the Group remains in a position to generate the resources needed to meet these claims as and when they fall due. A number of the other companies faced with the same issues have been forced into insolvency, often leaving claimants, where there is no insurance cover, with little prospect, if any, of receiving compensation.
As can be seen from the summary of the profit and loss accounts and balance sheets of the Group for the years ended 31 December 2002, 2003 and 2004 and for the six months ended 30 June 2005, set out on pages 78 and 79 of this document, the Group is at present generating sufficient funds to discharge its liabilities as and when they fall due. The Cape Directors expect this situation to continue. Nevertheless, the uncertainty over asbestos-related claims in the future is having a prejudicial effect on the growth and development of the Group's businesses.
As a result of the uncertainty it is likely that the Group has lost a number of business opportunities, and absent the Scheme may continue to do so, as for example the Group has, at times, been unable to obtain funding at commercially acceptable rates. There are also certain significant organisations in the Group's fields of activity which have limited or placed conditions on their dealings with the Group, for example, by demanding guarantees or bonds in circumstances in which they would not do so of the Group's competitors. The Cape Directors believe that such restraints on the Group's ability to expand should be alleviated to a significant extent if the Scheme were in place.
The purpose of the Scheme is to provide long term financing of the claims of Scheme Creditors in a manner which on the one hand provides the Group with significant protection from the risk of insolvency and on the other hand, by reason of the enhanced opportunities which this protection provides, makes it more likely that over time the Group will be able to discharge its liabilities to Scheme Creditors in full.
The intention is that the Scheme will provide the Group with a stronger and more secure financial base. The Directors believe that from this base the Group should be better able to generate the resources needed to secure the continued payment of compensation to Scheme Creditors. The Directors also believe that the Scheme, if implemented, should remove a significant obstacle to the Group's growth and should assist the Group in increasing its business activities."
Each of the companies proposing the scheme applied for an order summoning meetings of two classes of creditors, described as recourse scheme creditors and general scheme creditors. The former are those creditors whose claims are or may be covered by insurance. In the event of the insolvency of a scheme company, they would have rights directly against the company's insurers under the Third Parties (Rights Against Insurers) Act 1930, which are modified by the terms of the scheme. Because of these modifications to their rights, the recourse scheme creditors constitute a separate class. As it is impossible to know whether and to what extent their claims will be covered by insurance, they also form part of the class of general scheme creditors. There was argument on some issues as to the composition of classes at the convening hearing: see paragraphs 23–52 of my earlier judgment.
Meetings of the two classes of creditors of each company originally proposing the scheme were convened in accordance with the court's orders. In relation to nine subsidiaries of Cape no creditor attended or voted at either meeting and, in relation to two others, only one meeting was attended by any creditor. Accordingly, the scheme cannot be sanctioned as regards those companies. They are not among the companies whose inclusion is essential to the objects of the scheme and, in accordance with express provision in the scheme, it has been modified to exclude them. In the case of one company, Altitude Scaffolding Limited, each meeting was attended by only one creditor. This raised a legal issue as to whether one person can constitute a "meeting" for the purposes of section 425, which I have dealt with separately: see [2006] EWHC 1401 (Ch).
Attendance at the meetings of the other companies varied considerably. This is not surprising in a group of companies, where the businesses of some companies have been very much more extensive than others. Section 425(2) requires a scheme to be approved by a simple majority in number representing three-fourths in value of the creditors attending a meeting. In the present case, the majorities in number were never less than 93.75% and the majorities in value were never less than 93.12%. Taking all the votes cast at all the meetings the majorities in number and value were over 97%.
The function of the court in considering whether to exercise its discretion to sanction a scheme is summarised in the often-cited passage from Buckley on the Companies Act (14 th ed pp 473–474), which is derived from the judgments of the Court of Appeal in In re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 and In re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385:
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme."
In approaching the question as to whether to sanction the scheme in this case it must be borne in mind that it is a highly unusual scheme with far-reaching consequences for the people affected by it. It affects the rights of creditors of companies which are presently solvent and able to meet claims as and when they fall due. If sanctioned, it will bind not only those presently making claims but those who may in the future make claims arising out of past exposure to asbestos dust. Such claims may be made over a period which may extend for up to 40 to 50 years. The proposals are necessarily very complex, even to...
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