The Co-Operative Bank Plc v the Companies Act 2006

Hearing date: 3 December 2013

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The question I now have to consider arises in the context of a scheme of arrangement (which I shall call "the Scheme") proposed by the Co-operative Bank Plc, which I shall describe as "the Bank", pursuant to section 896 of the Companies Act 2006 and relating to seven series of subordinated debt securities which I shall describe as the "Dated Notes".

The Dated Notes represent an aggregate principal amount outstanding of some £937 million. Though it relates solely to the Dated Notes, the Scheme is part of a more general exercise, the aim of which is to recapitalise the Bank in the wake of the significant financial pressures which it is currently facing as a consequence of business losses and changing and more stringent regulatory requirements.

The more general exercise has been referred to before me, and I think has been generally referred to as a matter of course, as the "Liability Management Exercise". The aim of that is to raise capital for the Bank of some £1.2 billion. Such are the financial pressures on the Bank and its pressing need for capital that if the Liability Management Exercise is not implemented by the end of this year, now very fast approaching, it is likely that the Bank will be subject to a special resolution procedure pursuant to the terms of the Banking Act 2009. The Scheme has thus been put forward in circumstances of considerable urgency. If the Bank goes into what came to be referred to before me as "Resolution", the creditors and shareholders of the Bank to whom the Scheme is proposed are unlikely to receive any substantial return.

On 18 November 2013, I made directions at the first hearing of the Scheme for a single meeting of all Scheme Creditors, comprising all seven series of Dated Notes for the purpose of considering or approving the Scheme as then proposed. The Scheme as then proposed was the product of considerable negotiation since July or so, between the Bank and the dated noteholders; and more particularly, perhaps, between the Bank and a group of dated loan noteholders to whom I shall refer as the "LT2 Group".

When the matter was before me on 18 November, I was concerned only with the question of whether a single meeting of the seven series of dated noteholders would suffice and, if so, what directions should be given for that meeting, its convention, notification and procedure. The hearing on 18 November was, in other words, the Re Hawk meeting, dealing with matters identified as appropriate to be dealt with, in the context of a scheme of this kind, by the case in the Court of Appeal of that name.

For the reasons I sought to set out in an ex tempore judgment at the end of that hearing, I was persuaded that a single meeting of Scheme Creditors would suffice, given especially the common plight of all seven series faced with the alternative of Resolution. Since 18 November, however, what is described by the proponents of the modification to the Scheme as a serious "glitch" in the Scheme as originally proposed has emerged or become apparent. The glitch adversely affects owners of large holdings of Dated Notes, though it correspondingly may benefit holders of small numbers of Dated Notes, for the reasons I shall describe.

A group of dated noteholders, many of whom (but not all of whom) form part of the LT2 Group who principally negotiated the Scheme with the Bank, and who together represented an aggregate of 55% by value of the Dated Notes, have requested the Bank to agree to a modification of the Scheme. As I understand it, the percentage presently locked up is some 66%. The modification now proposed is also supported by Invesco Perpetual (which I shall refer to as "Invesco") as the agent and investment manager of several funds and the beneficial owners of a significant but not specified amount of Dated Notes. Invesco had noticed and communicated to the Bank, I think on 27 November, its concern about the glitch that has emerged. Invesco is not a member of the LT2 Group and was not involved in the negotiation of the Scheme.

The Bank itself, as the proponent of the Scheme, has considered the request for its modification and acceded to it, subject of course to the approval of the court, since all are agreed that the modification proposed constitutes one of greater substance than could be made under the provisions for amendment already contained in schemes of this kind, and indeed provided for by this Scheme.

However, a number of holders of smaller amounts of Dated Notes have objected to the modification. These objectors consider that there was no glitch as such, but simply that this was one of the features of the Scheme on which they are entitled to rely. The objectors that I have heard argument from, and who have appeared before me, seem likely to be representative of a number of smaller holders, either presently holding small holdings or who, by a process of splitting, may in the future hold smaller holdings. I shall return to the competing arguments later, after first explaining in broad terms the nature of what has been described as a glitch and the proposed modification to remove or attenuate it.

The glitch is explained in more detail in the second witness statement of Mr Niall Booker, the Chief Executive Officer of the Bank. He explains both the problem and the solution in paragraphs 14 to 27. Subject to any comments to the contrary, I would propose simply to attach a copy of those paragraphs to this judgment. However, for present purposes, I can take a summary of the source of the glitch and the solution proposed from the skeleton argument of Mr Zacaroli QC, counsel for the Bank. His starting point is a brief comparison of the Scheme as originally proposed and as suggested to be modified.

The Scheme as originally proposed provides that the Dated Notes would be cancelled in exchange for the restructuring consideration consisting of, first, £100 million of the 11% Bank T2 Notes; and secondly, 112,500,000 new ordinary shares in the Bank, representing 45% of the new equity in the Bank; and thirdly, the opportunity to participate in a £125 million cash subscription offer in respect of a further 62,500,000 additional new ordinary shares, representing 25% of the new equity in the Bank, through the open offer at a price of £2 per share. It is the terms of this open offer which have given rise to the problem in this case.

The proposed modifications intended to address those problems would alter the restructuring consideration in the following respects:

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

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

By way of further explanation, I would add to that summary in the skeleton argument the point which may be implicit or obvious, which is that it is a discounted value of the shares available for subscription in the open offer which has made them so attractive to potential investors holding Dated Notes. In essence, the reason for the request for modification is that there has been, and is likely to continue to be, a significant number of subscriptions for the minimum allocation by holders of small numbers of Dated Notes. I should explain that the minimum allocation requirement was introduced into the Scheme, as originally proposed, in order to ensure that the requirement for an equity prospectus would not have to be fulfilled. That was necessary in order to achieve the timetable, which is a very hurried one, as I have explained.

The consequence of what has been described as a glitch is that the proportion of shares available, pursuant to the open offer for owners of larger holdings of Dated Notes, may become significantly less than their proportionate holding of Dated Notes. The reason for this is summarised in the skeleton argument of counsel for the Bank as follows:

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

(2) In addition, a necessary...