A scheme of arrangement is an important avenue for a company under financial stress to compromise debts owed to specified categories of creditors. In broad terms, there are four steps to a scheme. The first step is to determine which creditors are to be covered under the scheme, categorize them, and to seek leave from the High Court to convene a meeting of each category of creditors. The second step is to hold and pass the appropriate resolutions at the meeting(s) of creditors. The third step is to obtain the sanction of the High Court of the scheme. After sanction, the scheme is then, as a fourth step, implemented. It is usual and commercially necessary that a scheme does not extend to certain creditors, who are referred to as “excluded creditors”. These are normally the essential trade creditors and professional advisers to the company.
In a judgment handed down last week, the Court of Appeal somewhat clarified the sanctioning court’s powers over excluded creditors. It held that the court can enquire into matters involving excluded creditors to the extent that such matters may have a bearing on whether or not the scheme should be sanctioned. It emphasised that a whole host of issues could fairly be considered relevant to the sanction of a scheme. The court may thus look into the reasonableness of excluding a particular creditor or the professional fees payable to the advisers involved in putting together the scheme.
The issue arose as a differently constituted Court of Appeal had, in a prior hearing of the scheme under consideration, varied the fee arrangements between the company and the scheme manager. The fee arrangements were excluded under the scheme. The earlier court judgment did not require the scheme with the modified fee arrangements to be voted upon again by the scheme creditors. The question was whether the Court had the power to do so as the intervention had altered the scheme such that it was no longer that which the creditors had approved.
The Court of Appeal declined to reverse the earlier intervention, ruling that the doctrine of issue estoppel (as re-formulated in this judgment in detailed and closely reasoned passages which will spawn hours of discussion amongst the litigation bar) barred the intervention from being reconsidered. The Court chose to express itself as follows:
“… there is some force in this argument, but, in our judgment, the fact that [the earlier Court] may have been wrong in deciding it had the power the make the [relevant orders] does not afford us a basis for reopening [the earlier decision] … In the final analysis, the public interest in the finality of litigaiton must prevail”.
It will require another scheme for the High Court to address the question of whether, and how far, a court can amend a scheme of arrangement, without requiring a re-vote by the scheme creditors, while still sanctioning it.
The Court of Appeal’s judgment also clarified what types of matters the scheme creditors need to be made aware of prior to being asked to vote on a proposed scheme of arrangement. The Court reviewed the reasoning of the earlier judgment as to why the fee arrangements between the company and the scheme manager had to be disclosed to the creditors and emphasised that the key findings were:
- in a scheme of arrangement, the company and scheme manager have a duty to disclose material information to the creditors and the court;
- the particular fee arrangement in question was a material contingent liability that should be disclosed.
The Court of Appeal said that “read holistically” the earlier decision:
“… does not and cannot reasonably be taken to suggest that [the scheme manager] was dishonest or acted in bad faith. The essential steps in the … [reasoning] … certainly do not include a finding to that effect … [nor] that the [scheme manager] had in fact acted against the interests of the Scheme Creditors …”.
In short, the threshold for disclosure is materiality and not any higher one of misconduct.