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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Cape Plc & Ors, Re Companies Act 1985 [2006] EWHC 1316 (Ch) (07 June 2006) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2006/1316.html Cite as: [2006] EWHC 1316 (Ch), [2007] Bus LR 109, [2006] 3 All ER 1222

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/06/2006

The Honourable Mr Justice David Richards :

Introduction

1. This is an application under section 425 (1) of the Companies Act 1985 by Cape Plc and twenty four subsidiaries (the scheme companies) to convene meetings to consider a composite scheme of arrangement proposed between those companies and actual and potential claimants for damages for asbestos–related personal injuries. In this judgment I give the detailed reasons for the orders which I made for convening the meetings.
2. Cape and its subsidiaries carry on successful businesses in the provision of industrial support services to the energy sector. Cape's shares are listed on the Alternative Investment Market of the London Stock Exchange. Its principal businesses used to be asbestos mining and the manufacture, distribution and installation of asbestos products. As with other companies previously engaged in those businesses, it faces a substantial number of claims for damages arising from exposure to asbestos dust. Because of the long latency periods of the more serious asbestos–related conditions, there will be a significant volume of claims in the future and claims may continue to be made for anything up to 40 to 50 years.
3. There is great uncertainty as to the likely cost of future claims. As well as the inherent difficulties in forecasting claims of this type over a long period, there are specific uncertainties, including the extent to which scheme companies may be liable in respect of other subsidiaries and former subsidiaries (the additional companies) which had or may have had inter–company indemnity, agency or business transfer arrangements, the extent to which the Financial Services Compensation Scheme will respond to claims against insolvent insurers and the legal treatment of pleural plaques claims (see Rothwell v Chemical & Insulating Co Ltd [2006] EWCA Civ 27, now on appeal to the House of Lords). Actuarial reviews commissioned by Cape of the discounted value, net of insurance, of all unpaid UK claims, including future claims, have produced a best estimate of £119.4 million in a range of £70.2 to £240.3 million. Nonetheless, the uncertainties are such that the board of Cape is unable to reach a conclusion on any figure.
4. Unlike some other asbestos producers, Cape is solvent. A significant factor is that it is not affected by claims made against it in the United States, following the decision of the Court of Appeal in Adams v Cape Industries Plc [1990] Ch 433.
5. Although Cape is solvent and expects to remain so, the uncertainty as to future asbestos–related claims raises a real but unquantifiable risk that at some point in the future Cape or other companies in its group could become insolvent. This in turn acts as a brake on the development of the group's businesses. Lenders and investors are naturally cautious about committing finance on a long–term basis in these circumstances, and the cost of finance is higher than would otherwise be the case. The chairman of Cape describes the problem in these terms:

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 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.

6. This detrimental effect on the group's business has a corresponding impact on the prospects for asbestos claimants. Leaving aside insurance cover, which, though important, is inadequate to meet all likely claims, the group's ability to meet the claims is dependant on the successful continuation and development of its businesses. It is those businesses which will generate the earnings needed to pay claims.

Development of the scheme proposals

7. Against this background, Cape and its advisors have developed proposals with a view to protecting the group's businesses from asbestos claims, so as to maximise the opportunities for their successful development, while at the same time directing a proportion of its earnings to the payment of asbestos claims. It is these proposals which are contained in the proposed scheme of arrangement and the documents to be executed or adopted pursuant to the scheme. I describe the proposals in summary form later in this judgment.
8. I will also later deal in more detail with the definition of the creditors to be affected by the scheme. In very broad terms, they are persons who now have or may in the future have personal injury claims or claims under the Fatal Accidents Act 1976 against any scheme company, arising out of exposure to asbestos for which the scheme company is or may be responsible. They also include asbestos–related derivative claims, such as claims by other employers for indemnity or contribution.
9. The majority of claims by individuals are made by present or former employees or their dependents. There are also claims by workers in other businesses in which Cape products were used, by members of the families of employees and other workers, and by claimants who lived close to Cape factories. Employees' claims may be made for breach of contract, breach of statutory duty or common law negligence. Dependants may make claims under the Fatal Accidents Act 1976 and other claims are made in negligence.
10. Cape announced its intention to seek to put in place proposals to deal with exposure to asbestos claims in June 2005 at the time of an issue of shares designed in part to raise funds for this purpose. Applications were made to the court in June and November 2005 for directions in accordance with the Practice Statement (Companies: Schemes of Arrangement) [2002] 1WLR 1345 as to the notification to be given to persons potentially affected by the scheme. In a case such as this, involving twenty-five companies and a wide range of potential claimants whose exposure to asbestos, whether as employees or otherwise, has occurred over a long period, this has itself been a complex process.
11. Among those who have been involved in the process of consultation since June 2005 are trade unions, asbestos victims support groups, and firms of solicitors who regularly act on behalf of asbestos – related personal injuries claimants.

Claimants' representation on this application

12. Thompsons, solicitors, act for many claimants against Cape and companies in its group and they are also coordinating responses to the proposals on behalf of a number of interested parties, including trade unions and support groups. For the purposes of making submissions on the present application, they appear for John Duncan Hurst, a former employee of a Cape subsidiary, who has a provisional award of damages. By reason of the terms of the award and section 32A of the Supreme Court Act 1981, he will be entitled to apply for a further award of damages if he should develop any other diseases or conditions specified in the judgment. Mr Pascoe QC and Mr Groves are instructed on his behalf.
13. Russell, Jones & Walker are another firm of solicitors acting for asbestos–related personal injury claimants. They appear on this application for Vincent O'Brien. Mr O'Brien is currently a part-time employee of Cape, but he was previously a full-time employee of a subsidiary and in the course of that employment he was intermittently exposed to asbestos. He does not currently suffer from any asbestos–related condition. His employer was one of the additional companies and, during the period of his employment, it appears that it was carrying on business as agent for Cape, which later provided an express indemnity. If Mr O'Brien were to develop any actionable condition, he would have a claim against his former employer and probably an alternative claim against Cape. Mr Phillips QC and Mr Fisher are instructed on his behalf on this application.
14. Cape is funding the costs of these firms for the purpose of dealing with the scheme and has also funded the cost of a report by KPMG on the financial aspects of the scheme and the financial position of the Cape group prepared at the request of Thompsons.
15. Although formal representation orders have not been made in respect of Mr Hurst and Mr O'Brien, they are represented on this application so that argument can be addressed to the court, from the standpoint of claimants who would be bound by the scheme, on issues which arise for consideration at this stage. It has enabled experienced counsel to consider the jurisdictional and similar issues raised by the schemes and to make submissions on those questions which they consider arise for decision. This has been of great assistance both to the court and to Cape as the proponent of the scheme. I am grateful for the submissions of all counsel and the work of their instructing solicitors.
16. The involvement of solicitors and counsel on behalf of the interests of claimants has also assisted greatly in the development of the proposals by Cape and its advisors. They have made a considerable number of suggestions for changes, many of which have been accepted by Cape. There are others which have not been accepted. There are various issues raised which go to the merits of the proposals, which will or may be relevant to the exercise by the court of its discretion to sanction the scheme if it is first approved at meetings of claimants, but which do not therefore arise at this stage.

The Issues

17. There are three issues which have been raised for argument at this stage. Mr Phillips has raised two issues. First, he submits that potential future claimants should in the circumstances of this case be in a separate class from those with present but unresolved claims. Secondly, and in any event, he submits that the court will not sanction a scheme which contains provisions for the subsequent amendment of important terms, either in the scheme itself or in agreements and other documents which are to be executed pursuant to the scheme and which contain terms which are integral to the scheme. Mr Pascoe has raised a separate point. He submits that, by excluding or restricting the liability of the scheme companies for personal injury and death, the scheme falls foul of the Unfair Contracts Terms Act 1977.
18. These points either go to the jurisdiction of the court to sanction the scheme or are such that, if well founded, the court would inevitably refuse to sanction the scheme. They are therefore properly raised for consideration and decision at this stage. While the first points turns on the circumstances of this case, the second and third are matters of general application.

The terms of the proposed scheme

19. The proposals embodied in the scheme and the various agreements and other instruments to be executed or adopted pursuant to it (the ancillary documents) are by any standards complex. This is hardly surprising, in view of the many factors which have to be addressed and the period of up to 50 years or so during which it will have effect.
20. The following summary of the proposals is based on that contained in the written submissions of Sir Thomas Stockdale, counsel for Cape and the other scheme companies. References to scheme creditors are to the actual and potential claimants who would be bound by the scheme. In very broad terms the proposals can be summarised as follows:-

(a) While scheme creditors will continue to be able to bring proceedings against scheme companies for declaratory relief to determine whether they have a claim and, if so, of what amount, those claims will only be enforceable against a subsidiary of Cape called Cape Claims Services Limited (CCS) under the terms of the Scheme Guarantee, one of the ancillary documents.

(b) CCS will in the first instance be funded with a sum of £40 million. This sum has not been calculated by reference to an estimate of the likely amount of Scheme Claims. It simply represents the aggregate of the amount Cape was able to raise by the issue of shares and the level of debt it can reasonably maintain for the purposes of the Scheme. Of fundamental importance to the Scheme are the provisions for the topping up of that sum described below.

(c) Commencing in 2008, there will be an assessment every three years of the projected Scheme Claims payable by CCS over the following nine years. By reference to each assessment there will be established a continuing funding requirement (the Funding Requirement).

(d) The assessment will be broken down into assessments of projected Scheme Claims payable by CCS in each of the nine years to which the assessment relates.

(e) In the event that an assessment reveals a shortfall between the available assets of CCS (the Scheme Assets) and the Funding Requirement, Cape will top up the Scheme Assets over the following three years provided that sufficient cash is available to it to do so. The obligation of Cape in each year will be limited to 70 per cent of the Group's available cash resources (itself the subject of a complex formula). This obligation will arise under a Funding Agreement, to be made pursuant to the terms of the scheme.

(f) If Cape is not able to meet its top-up obligation in any one year it will be required to make good the shortfall in the next year, again subject to sufficient cash being available.

(g) Alongside the Funding Requirement there will be a Scheme Funding Requirement which will be assessed every year by reference to Scheme Claims payable by CCS over the next 6 years as projected in the assessment referred to in sub-paragraphs (c) and (d) above.

(h) If at any time the ratio of the Scheme Assets to the Scheme Funding Requirement (the Scheme Funding Percentage) falls below 60 per cent CCS will have the ability to reduce the percentage of each established claim which it pays to Scheme Creditors (the Payment Percentage) until such time as the Scheme Funding Percentage is restored to 60 per cent.

(i) Special voting shares have been created in Cape and CCS which will be held by an independent third party (expected to be The Law Debenture Trust Corporation plc) (the Scheme Shareholder) on the terms of a trust deed. These shares will confer special rights which are designed to enable the Scheme Shareholder to protect the interests of Scheme Creditors.

(j) From 2008, but subject to sub-paragraph (k) below, Cape will be permitted to pay dividends, provided that at the time of payment (a) the Scheme Funding Percentage in relation to the last preceding financial year was certified to be not less than 110 per cent, and (b) the Payment Percentage has not at any time within the previous 40 days been below 100 per cent.

(k) The dividend payable in any particular financial year may not without the consent of the Scheme Shareholder exceed the greater of (i) 50 per cent of the consolidated operating profits of the Group for the financial year by reference to which the dividend is proposed and (ii) the aggregate of any permitted dividends paid in the last preceding financial year.

(l) In the case of certain scheme creditors (Recourse Scheme Creditors), who are those scheme creditors whose claims are in whole or in part the subject of a contract of insurance (defined as Recourse Scheme Claims) their rights to enforce their Recourse Scheme Claims against a relevant scheme company will revive in certain circumstances. These circumstances are where the relevant scheme company is insolvent or where there has been a specified reduction in the Payment Percentage and, if a scheme creditor was able to bring about the insolvency of the relevant Scheme Company, he would be able in respect of his claim (or that part of his claim which is the subject of a contract of insurance) to recover greater compensation from the Financial Services Compensation Scheme (the FSCS) or, in certain circumstances, from a solvent insurer than is available from CCS at that time under the Scheme. The purpose of these provisions is to preserve the rights of those creditors under the Third Parties (Rights against Insurers) Act 1930.

(m) If the claim of a Recourse Scheme Creditor is one which is only in part the subject matter of a contract of insurance it is only in respect of that part that his rights will revive. As to the remaining part, which is not the subject matter of a contract of insurance, he will continue to be bound by the scheme and his rights will only be enforceable against CCS.

(n) Each scheme company will agree to hold on trust for any scheme creditor concerned the proceeds of any policy of insurance (or any compensation received from the FSCS) referable to that creditor's Scheme Claim.

(o) Provided that the scheme becomes effective in relation to each of four key companies, namely Cape, Cape Industrial Services Limited, Somewatch Limited and Predart Limited, the scheme can be modified to exclude any scheme company or scheme companies without affecting its binding nature as to the remainder.

Composition of classes

21. The schemes are proposed to be made between each scheme company and persons who claim that they have now or may in the future have either Asbestos Personal Injury Claims or Asbestos Contribution Claims. The former are, in summary, claims by individuals for debt, damages or other relief in respect of death or personal injury or under the Fatal Accidents Act 1976 (or their equivalents in Scotland and Northern Ireland), arising out of or connected in any way with exposure to asbestos attributable in whole or in part to any act or omission on the part of the relevant scheme company occurring before 1 March 2006. The relevant claims are restricted to those governed by the law of any part of the United Kingdom (and, for these purposes, treating the Private International Law (Miscellaneous Provision) Act 1995 as applicable to all claims, irrespective of when the relevant acts or omissions occurred) and the claimants are restricted to those resident in the United Kingdom on 1 March 2006 or, if not so resident, to those whose claim is attributable to exposure to asbestos in the United Kingdom in the course of employment by a scheme company or by an additional company.
22. Asbestos contribution claims are derivative or indirect claims arising out of or connected with an Asbestos Personal Injury Claim or a claim which, if brought against a scheme company, would have been such a claim. They are principally claims by other employers either for indemnity, where Cape products were used in their business, or for contribution. Since the hearing, the House of Lords has given judgment in Barker v Corus (UK) plc [2006] 2 WLR 1027 and it is likely that it will significantly reduce the scope for contribution claims. Certain specific categories of these claims are excluded for reasons which are explained in the evidence and which have not been challenged by Mr Phillips or Mr Pascoe.
23. Cape proposes that in the case of each scheme company the creditors should be divided into two classes, recourse scheme creditors and general scheme creditors. The former are claimants whose claims are or may be covered, in whole or in part, by insurance or by the FSCS to the extent that any relevant insurer is insolvent. Although it is likely that a significant number of claims by employees or former employees will be wholly or partly covered by insurance, it is for reasons set out in the evidence impossible to be certain, as regards any particular claim, whether it will in fact be covered at all and, if so, the extent of the cover. There is a much smaller number of claims which will definitely not be covered by insurance.
24. The reason for dividing the creditors into these two classes is that there are, as mentioned above, provisions of the scheme which are designed to give effect to the rights of recourse scheme creditors under the Third Parties (Rights against Insurers) Act 1930 but which do so in a way which modifies their rights. The principal provisions of the scheme in this respect are as follows. First, each scheme company will hold on trust for the scheme creditor concerned the proceeds of any insurance policy, or any compensation received from the FSCS, referable to his claim. Secondly, a recourse scheme creditor will be released from the prohibition under the scheme on taking enforcement steps against a scheme company in certain defined circumstances. The release will arise if any of the insolvency events specified in section 1(1)(b) of the 1930 Act occurs. A recourse scheme creditor can also elect to be released from the prohibition where either (i) the payment percentage set by CCS under the Scheme Guarantee is 50 per cent or lower, or (ii) his claim, once established, is not fully paid within 12 months. In very broad terms, the release is effective to the extent that there are insurance recovery rights which would become available to the claimant under the 1930 Act.
25. Plainly these provisions of the scheme distinguish those claimants for whom there is some insurance cover from the others. While this means that those claimants who are likely to have some insurance cover have an advantage not available to the others, it largely reflects their existing rights. In one important respect, those rights are adversely modified by the scheme. A claimant with an established but unpaid claim against a scheme company would in the absence of the scheme be able to petition for the winding-up order and, on the making of a winding-up order, could then enforce the company's rights against its insurers as regards the claim. Under the scheme, a recourse scheme creditor may have to wait twelve months before doing so.
26. For these reasons, the scheme companies propose separate meetings of the recourse scheme creditors. As it is impossible to know whether and to what extent their claims will be covered by insurance, it is also proposed that they should also form part of the class of general scheme creditors and vote at their meeting. In my judgment it is right to do so. A member or creditor who falls into two classes is properly a member of each class: In re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213.
27. If therefore it was known that the claim of a recourse scheme creditor was covered to the extent of 40 per cent, he would be a general scheme creditor for the balance of 60 per cent. It should make no difference that there can be no certainty on that issue, so that each recourse scheme creditor is a person whose claim may in whole or in part be a general scheme claim.
28. In order to consider the issue on class of composition raised by Mr Phillips, it is first necessary to identify the broad categories of scheme claims, divided according to the evolution of the claims. In the course of argument, claims were divided into four types. Types 1 are claims which are or will by the effective date be established, as to both liability and quantum. They will therefore be presently payable debts and the scheme provides for their payment by CCS within 20 days after the effective date. As they are for all practical purposes certain to be paid, they will not vote on the scheme. They will not therefore be bound by the scheme, but this will have no practical consequence provided they are paid as intended. The other claimants will be bound by the scheme to accept that Type 1 claimants are paid in full.
29. Type 2 claims are those in respect of which an actionable condition has been notified, liability has been admitted but quantum has yet to be agreed or determined. Type 3 claims are those in respect of which an actionable condition has been notified but liability has not been admitted or determined. When Types 2 and 3 claims are established, the claimant will have the choice of electing between a final or a provisional award of damages. Claimants whose conditions were pleural plaques (not now an actionable condition), pleural thickening or asbestosis have commonly elected for a provisional award.
30. Types 4 are all the potential claims and they cover a wide variety. They include all future claims in cases within Types 1, 2 or 3 where the claimant has elected or will elect for a provisional award. They also include claims where an actionable condition has developed, whether or not yet known to the claimant, but no claim has yet been notified. It is a feature of a number of asbestos–related conditions that the damage first occurs, as with the first malignant cell in a case of mesothelioma, many years before any symptoms are apparent. It further includes claims where exposure to asbestos dust has occurred but no actionable condition has yet developed. (Statistically there is a strong chance that no condition will develop). In these cases, former employees and others in contractual relations with a scheme company already have an accrued cause of action for breach of contract, but only for nominal damages. Claims in common law negligence will accrue only if and when an actionable condition develops. In In re T & N Limited [2005] EWHC 2870 (Ch), I held that persons who have been exposed to asbestos by the act or omission of a company in breach of a common law duty of care but have yet to develop any actionable condition are contingent creditors of the company for the purposes of section 425 of the Companies Act 1985. There was no challenge to that decision in this case.
31. Mr Phillips submitted that the persons with Type 2 or 3 claims should form a separate class from those with Type 4 claims. The basis for this submission was not an intrinsic difference between actual and potential claims, but a consideration of the evidence which, he submitted, demonstrated that there was no practical risk that Type 2 and Type 3 claims would not be paid in full, but a material risk, increasing over time, that Type 4 claims would not be paid or not paid in full. Viewed as a matter of practical reality, the rights of the Type 2 and 3 claimants under the scheme were to payment of their claims in full, as opposed to the uncertain outcome for Type 4 claimants. Sir Thomas Stockdale for Cape accepted that if in terms the scheme provided for full payment of Types 2 and 3 claims, but not for Type 4 claims, it would result in two separate classes. However, not only did the scheme not so provide, but there could in practice be no certainty of full payment of Types 2 and 3 claims. Further, a significant number of those with Types 2 and 3 claims are likely to elect for a provisional award and they are potentially therefore also Type 4 claimants.
32. There was no fundamental difference between counsel as to the principles applicable to determining the composition of classes for the purposes of a scheme of arrangement. They have been considered in a number of recent authorities. The leading English authority is the decision of the Court of Appeal in In re Hawk Insurance Co Ltd [2001] 2 BCLC 480 which, among other things, reaffirmed the basic test propounded by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 that a class:

"must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."

33. The emphasis is on rights, not commercial or other interests, and on the similarity or dissimilarity of rights, not whether they are identical. In considering the relevant rights, the Court of Appeal in In re Hawk Insurance Co Ltd made clear that they are the existing rights of the persons to be bound by the scheme and their rights under the scheme. A sufficient dissimilarity in one or the other will require separate classes. In considering the rights under the scheme, the comparison must be made with their rights as they would in reality exist in the absence of the scheme. The scheme in In re Hawk Insurance Co Ltd provided for payments at different rates on three classes of claim. This did not require separate meetings because the alternative to the scheme was an insolvent liquidation and the different payment rates reflected in a rough and ready way the discounts which would be applied in liquidation to proofs of debt for claims in the three classes. In substance the scheme gave effect to the creditors' rights which would exist in the absence of the scheme in a way which created no difference of treatment.
34. The Court of Appeal drew attention to the importance of determining whether the compromise or arrangement contained in the scheme is in truth only a single compromise or arrangement. Chadwick LJ referred at paragraph 16 to

"cases where what appears at first sight to be a single compromise or arrangement between the company and all its creditors (or all creditors of a particular description; say, unsecured creditors) can be seen, on a true analysis, to be two or more linked compromises or arrangements with creditors whose rights put them in several and distinct classes. The compromises or arrangements are linked in the sense that each is conditional upon the other or others taking effect. In such a case, the section provides for the court to order – and the court should be asked to order – that there be summoned separate meetings of each of the distinct classes of creditors."

Chadwick LJ also noted that the court should not require creditors to be divided into separate classes unless it was necessary to do so to give effect to the principles summarised above, "lest by ordering separate meetings the court gives a veto to a minority group… It is important Bowen LJ's test should not be applied in such a way that it becomes an instrument of oppression by a minority" (paragraph 33).

35. With these considerations in mind, the question of whether the rights of creditors are so dissimilar as to require separate meetings is a matter of judgment on the facts of each particular case. Subsequent decisions at first instance show the application of these principles: In Re Equitable Life Assurance Society [2002] BCC 319, In re Telewest Communications plc (No 1) [2005] 1BCLC 752.
36. In considering whether the existing rights of creditors are affected by the scheme in different ways, it is essential to have regard to the realistic alternative. In In re Hawk Insurance Co Ltd the company was in provisional liquidation and was insolvent. An insolvent liquidation was the only alternative to the scheme. The effect of the scheme on the rights of creditors therefore fell to be compared with their rights in an insolvent liquidation. In an insolvent liquidation, all claims, whether present or contingent would be valued and dividends paid on these amounts. In a rough and ready way, the scheme achieved the same result. Actual and contingent claimants did not therefore constitute separate classes. By contrast, in In re British Aviation Insurance Co Ltd [2005] EWHC 1621 (Ch), the company was solvent and a liquidation, whether solvent or insolvent, was not a realistic alternative. In the absence of a scheme, the company would continue in solvent run-off, paying claims as and when they fell due. In these circumstances, a scheme providing for the valuation and immediate payment of contingent claims involved a clear variation of the claimants' rights which distinguished them from actual claimants whose claims, if established under the machinery provided by the scheme, would be paid in full.
37. The proposed scheme in the present case and the circumstances of Cape are different from the facts of those cases in important respects. First, the scheme is not a cut-off scheme. It does not provide for the valuation and immediate payment of claims. As with the run-off of an insurance business, claims will be paid as and when they are made and established. For that reason, there is not in this case the same objection to combining actual and potential claimants in one class as applied in In re British Aviation Insurance Co Ltd. Secondly, the alternative to the scheme is that Cape will continue in business and will continue to meet established claims for as long as it properly can do so. It is presently solvent and is expected to remain so, but there is a risk of insolvency at some point in the future which cannot be disregarded. In these circumstances, a scheme which altered rights either against the company while it remained solvent or as they would be in a liquidation of the company, in either case in a way which distinguished between different creditors, would potentially involve the creation of separate classes of creditors. I say "potentially" because the different treatment must be such as to make it impossible for them to consult together with a view to their common interest. Not every difference in treatment will do so: In re Telewest Communications Plc (No 1) [2005] 1BCLC 752. The terms of the scheme do not as such provide any difference between treatment as between groups of creditors, except in certain limited respects which I describe later. They clearly do not do so in a way which involves a difference between the treatment of actual and potential claimants. The present position is that all actual and potential claimants are entitled to pursue their claims against Cape or other scheme companies, as and when they arise. Under the scheme they will all have rights to establish their claims against Cape or other scheme companies and to enforce them against CCS, which will in turn be obliged to pay them in full or in part as provided in the scheme and the ancillary documents and will be funded by Cape as provided in the ancillary documents.
38. While Mr Phillips accepts this analysis as a matter of construction of the relevant terms, he submits that it does not reflect the reality of the position as it affects the different groups of creditors. He submits that the evidence establishes that there is no prospect that Types 2 and 3 claims will not be paid in full, whereas there is real uncertainty as regards Type 4 claims which increases as time passes. That is equally the position without the scheme, but the effect of the scheme is (a) to substitute the certainty of recovery of Types 2 and 3 claims from CCS for the certainty of recovery from the scheme companies and (b) to require Type 4 claims to take their chance with CCS in place of taking their chance with the scheme companies. There is therefore no significant change for Type 2 and 3 claimants, but a potentially significant change for Type 4 claimants.
39. I agree with Mr Phillips that just as the reality of the position must be examined to identify the current rights of creditors, so the reality of the result under the scheme must be examined to identify whether it affects the rights of different creditors differently. Sir Thomas Stockdale did not, I think, take issue with this approach. He certainly accepted that if in terms the scheme guaranteed payment in full of Types 2 and 3 claims, they would constitute a separate class. It is difficult to see that if, though not guaranteed, there is in fact no doubt that those claims will be paid, the position should be different. Sir Thomas Stockdale had two answers to Mr Phillips' submission. First, Type 2 and 3 claimants were potentially Type 4 claimants. All of them would be entitled to elect either for a final award or a provisional award of damages. If they elected for the latter, they would be Type 4 claimants, that is persons who might in the future have a claim in respect of diseases which were either latent or yet to be contracted. It was impossible to say now whether they would elect for one kind of award or the other. The only qualification to that is that it can be assumed that those claimants who have contracted mesothelioma will elect for a final award. Mr Phillips disavowed any suggestion that they should form a separate class.
40. Sir Thomas' second answer was that on the evidence it was not clear that Types 2 and 3 claims would be paid in full. The sooner they were established, the greater the prospect that they would be paid in full, but there was no clear dividing line between the different types of claim. Rather, there was a spectrum of claims, with a greater prospect of payment in full at one end than at the other.
41. In support of both submissions Sir Thomas relied on the decision and analysis of Lloyd J in In re Equitable Life Assurance Society [2002] BCC 319. In that case the scheme of arrangement involved a variation of the rights of those holders of with profit policies which included in their terms guaranteed annuity rates applicable on the purchase of an annuity with the policy proceeds (GAR policies). The terms of the scheme were such as to require a separate meeting not only of the holders of GAR policies but also the holders of those policies which did not contain guaranteed annuity rights (Non-GAR policies). In addition, the holders of Non-GAR policies had or might have potential claims for compensation for misselling, which were compromised by the scheme.
42. A separate meeting of Non-GAR policyholders in their capacity as actual or potential misselling claimants was convened, even though it was acknowledged that there were likely to be wide variations in the strength of individual claims. In particular, it seemed likely that the later the policy was issued, the stronger the claim.
43. Lloyd J rejected submissions that there should therefore have been more than one class of misselling claimants. He said at paragraphs 53-54:

"53. It is, of course, likely that the strength of the misselling claims which different Non-GAR policy-holders might put forward would differ, according to the particular facts of each case. However, the misselling claims cannot possibly be valued on an individual basis for the purposes of the scheme. The time taken and the cost of such an exercise would be enormous. If the scheme had included such a provision, no single Non-GAR policy-holder could receive any uplift by way of compensation until all claims had been quantified. It seems to me that the consequent delay in settling the compensation to be given to individual policy-holders would be altogether unacceptable. That is a compelling reason for a flat-rate distribution…

54. The submission to the effect that late joiners are in a separate class, however, depends on establishing that the class proposed, whatever it may be, is in a fundamentally different position from all other members of the overall Non-GAR class. It is not sufficient to say that all those who took out policies after 1 January 1997, or 1 September 1998, or whatever date is chosen, have a strong case for compensation for misselling; it would have to be the case that they had an essentially and fundamentally different, and conflicting, claim from all others, including those who took out a policy a day or a week before whatever cut-off date is chosen. None of those putting forward this objection sought to do that, nor could they do so, so far as I can see… The fact (if it be the case) that their misselling claims should be regarded as stronger than those of others is a matter of degree, not of the nature of the right."

44. So, in this case, Sir Thomas Stockdale submits that whether the claimants have Type 2, 3 or 4 claims does not put them in a fundamentally different position. They all potentially have Type 4 claims and the differences in their prospects of payment in full are a matter of degree, not the nature of the right. Sir Thomas Stockdale's first answer to Mr Phillips' submission, that Types 2 and 3 claimants are also potentially Type 4 claimants, is in my judgment well-founded. The fact common to all claimants that they may have future claim, falling within Type 4, means that there is not such a dissimilarity in their rights as to require separate classes.
45. Nonetheless, if the position were that Types 2 and 3 claims were as a practical matter certain to be paid, a clear distinction would exist between those claims and Type 4 claims, whether or not Type 4 claims were held by creditors also holding Types 2 or 3 claims. In such circumstances, there would I think need to be two meetings, one of creditors with Type 2 and 3 claims and the other of creditors (whether or not they had Types 2 and 3 claims) with Type 4 claims.
46. I turn to consider whether the evidence establishes that Types 2 and 3 claims are for all practical purposes certain to be paid. It is Cape's expectation that they will be paid. Cape's view as disclosed in the evidence is that the initial funding of £40 million should be sufficient to meet claims for some years. In a witness statement dated 1 February 2006, Benjamin Whitworth, the secretary of Cape, states:

"CCS will in the first instance be funded with a sum of £40 million, which will represent what is considered to be a sufficient sum to discharge CCS's liabilities to Scheme Creditors which become payable over at least the next eight years (commencing on 1 January 2006)."

47. Statements to this effect are also included in the proposed explanatory statement. They reflect the advice of Tillinghast, the independent actuaries engaged by Cape, as to the estimate of the amounts payable, net of insurance recoveries, over the next eight years, together with the running costs of CCS for those years. Furthermore, it is the considered view of the board of Cape, having taken appropriate advice as to claims estimates that the scheme companies will continue, as they have in the past, to generate sufficient earnings to pay all claims as and when they fall due. Cape's evidence is that there is certainty that all scheme claims which are established before the first actuarial review in 2008 will be paid in full, although provision is made for an earlier review in exceptional circumstances. If, following that review or any subsequent review, it appears that the "Scheme Assets" (the net asset value of CCS, subject to certain adjustments) are less than 60 per cent of the estimate of claims payable over the following six years, CCS is able to reduce the payment percentage below 100 per cent. The scheme therefore caters for the possibility of less than full payment at any time from early 2008 (and, in certain circumstances, before that time), although the evidence establishes that on present forecasts this is unlikely to happen.
48. There is also evidence as to the likely periods in which Types 2 and 3 claims will be established and paid. Mr Whitworth's evidence is that on average claims for damages take approximately two years to settle but individual claims can take significantly longer. Liability and/ or quantum may be in issue. Even in the case of mesothelioma claims, which are expedited, and which are highly likely to be settled within two years, this is not certain, particularly where liability is not admitted. Moreover, costs may take significantly longer than damages to be settled and paid. Although usually a smaller amount than damages, costs can be significant.
49. The number of presently unsettled claims notified in the years 1995 to 2005 is 607, of which 20 pre-date 2000 and 186 pre-date 2003. More than half of the claims notified in each of the years 2002 to 2005 remain unsettled as to damages or costs.
50. While the evidence shows that the prospects for payment of Types 2 and 3 claims, and indeed Type 4 claims as and when made, are good, there can in my judgment be no certainty as regards any particular Type 2 or 3 claim either that it will be fully settled within two years or that it is as a practical matter certain to be paid. Sir Thomas Stockdale is, in my judgment, correct in his submission that all claims, whatever their type, are in a spectrum of likelihood of payment. There is no clear dividing line between them and it is impossible, as regards any particular claim, to pinpoint its place on the spectrum. The analogy with Lloyd J's analysis of the misselling claims in In re Equitable Life Assurance Society is well-founded. There is not on this basis such dissimilarity in the rights of the claimants as to require or justify their division into separate classes.
51. Both Sir Thomas Stockdale and Mr Phillips relied, for different purposes, on the report of KPMG. On the basis of a financial model prepared by Cape for a forecast period to 2021, enabling adjustments to be made to turnover and claims estimates, KPMG ran four scenarios. Scenario A is considered to be a realistic scenario and shows claims being met in full, with or without a scheme. The other scenarios are more pessimistic and were "deliberately chosen in order to explore what happens when either CCS or Cape are subject to financial stress". The payment percentage falls below 100% in 2010 under scenario B and in 2008 under scenario C and does not in either case thereafter recover to 100%. Sir Thomas relied on these scenarios to show the risks of non-payment of Type 2 and 3 claims, while Mr Phillips relied on them to show that Type 4 claimants were exposed to a much higher level of risk. I do not base my conclusions on these scenarios. They were not put forward by KPMG as realistic forecasts, but only, as they explained, to test the results of the assumptions on turnover and claims factored into those scenarios.
52. I have therefore concluded that there should not be separate classes, depending on whether a claim is Type 2 or 3 or, alternatively, Type 4. This does not mean that the relative weight of votes for or against the scheme from these different groups are irrelevant to the exercise of discretion as to whether to sanction the scheme. These will be recorded and the effect of the votes of different groups on the overall result can be assessed.

Amendment provisions

53. As already explained, the scheme provides for the execution and implementation of a number of agreements and other documents (the ancillary documents) which are integral to the scheme. They contain many of the essential provisions of the proposed arrangement. They are in many cases provisions which could have been included in the scheme.
54. The ancillary documents contain provisions which permit them to be altered in accordance with procedures contained in them. In the case of the articles of association of Cape and CCS, they are in any event alterable by special resolution under section 9 of the Companies Act 1985. In all the ancillary documents apart from the articles of association of Cape, alteration can be effected only with the consent of the scheme shareholders and the scheme directors, so as to provide protection for the scheme creditors. In the case of the articles of association of Cape the consent of the scheme shareholder will be required only in the case of alteration of provisions considered material to scheme creditors.
55. The need to make provision for amendment arises because the scheme is intended to remain in force and provide for the settlement of asbestos claims over a very long period. Over such a long period it is to be expected that changes will occur which are highly material to the operation of these arrangements. Changes in the applicable legal principles and in medical knowledge may have profound effects. Changes in the law are well illustrated by the recent decisions of the Court of Appeal in Rothwell v Chemical & Insulating Co Ltd [2006] EWCA Civ 27 and the House of Lords in Barker v Corus (UK) plc [2006] 2 WLR 1027. Changes in life expectancy and changes in the financial position of Cape may make amendments necessary or desirable.
56. Protection to scheme creditors is provided principally by the requirement for the consent of the independent trustee, expected to be Law Debenture Trust Corporation plc, as holder of the scheme shares in Cape and CCS. Variation of the agreements forming part of the ancillary documents requires the consent in writing of the holder of the CCS scheme share. Under the articles of association of CCS, there are many acts of CCS which require the prior written consent of the holder of the CCS scheme share. The articles of CCS provide also for the appointment of two Scheme Directors, to be nominated by the board but whose appointment must be approved in advance by the scheme shareholder. Only the Scheme Directors will be able to vote on matters pertaining to the agreements and other matters such as approving the determination or variation of the Payment Percentage. A scheme share will also be issued by Cape and held by the trustee under the articles of association of Cape. There are restrictions on Cape as regards some matters, such as the payment of dividends in certain circumstances, without the prior written consent of the holder of the Cape scheme share.
57. The terms on which the trustee will hold the scheme shares and exercise its rights to give or withhold consent as provided by the ancillary documents will be governed by a voting trust deed. The trust deed provides that the trustee will hold the scheme shares "on trust for the Scheme Creditors taken as a whole". No scheme creditor will be entitled to give any direction to the trustee or require the trustee to take any action which it believes to be inconsistent with its obligations and discretions under the deed and the companies' articles. The trustee is entitle to exercise its rights under the articles in its absolute discretion, but shall not exercise its voting rights or give its consent to any matter that it considers to be materially prejudicial to the interests of scheme creditors. The trustee may only consent to a variation to, or termination of, a scheme agreement if:

"(i) both Scheme Directors (or, if there is only one, the Scheme Director) shall have certified in writing to LDTC that they (or he) have (has) consented to such variation or termination and are (is) of the opinion that such variation or termination is:

A. in the interests of the Scheme Creditors taken as a whole; and

B. not materially prejudicial to the interests of each category of Recourse Scheme Creditors, General Scheme Creditors, Earlier Scheme Creditors and Later Scheme Creditors (each category taken as a whole); and

(ii) LDTC considers that such variation or termination is:

(A) in the interests of the Scheme Creditors taken as a whole; and

(B) not materially prejudicial to the interests of each category of Recourse Scheme Creditors, General Scheme Creditors, Earlier Scheme Creditors and Later Scheme Creditors (each category taken as a whole).

LDTC shall not give any such consent if it is unable to form the view that to give such consent would not be materially prejudicial to the interests of each of the separate categories of Scheme Creditors referred to in (ii)(B) above in this clause 4.3(c)."

58. The issue which arises is whether the court can sanction a scheme which directly or indirectly permits variation of material provisions affecting creditors bound by the scheme. It is well established that a scheme of arrangement, once sanctioned by the court, cannot subsequently be varied simply with the agreement or acquiescence of the creditors or shareholders concerned: Devi v People's Bank [1938] 4 All ER 337. However, Sir Thomas Stockdale submitted that there is no rule or practice which as a matter of jurisdiction or invariable practice prevents the court from sanctioning a scheme under which ancillary documents or the scheme itself contain provisions for their alteration As a matter of principle, the court has jurisdiction to sanction any arrangement into which the parties to the scheme, that is, the company and the relevant classes of creditors or members, could lawfully enter by unanimous agreement: In Re Guardian Assurance Co [1917] 1 Ch 431 at 449 per Warrington LJ. Plainly they could lawfully, by unanimous agreement, enter into an agreement on these terms. Whether or not it is right, as a matter of discretion, to sanction an arrangement on these terms is a different question to be addressed at the sanction hearing, if and when creditors have voted to approve it.
59. Counsel were not aware of any scheme in England which itself made provision for any variation in the terms of the scheme after it had been sanctioned, although schemes sanctioned by the court have provided that agreements executed pursuant to the terms of the scheme may in the future be amended. Sir Thomas Stockdale also referred to the many schemes which provide for the acquisition of shares or other securities in exchange for shares or securities issued by acquirer. The rights attached to shares will be subject to variation if the articles of association are altered and any procedure for variation of rights is followed. I do not regard that as a parallel because it is in the nature of shares that their rights may be altered by the procedures provided by the Companies Act. Closer perhaps is the issue of loan stock or other debt instruments which, as is almost universal, contain provision for variation of the rights attached to the instruments by resolution passed at a class meeting or by the written consent of a stated majority. The terms of the debt instruments could be spelt out in the scheme, but it has not, so far as I know, been suggested that they cannot be altered by use of a mechanism in the trust deed or other document constituting the loan stock. Additionally, schemes have been sanctioned which confer on, for example, the scheme administrator a wide discretion to fix and vary the payment percentage applicable to claims in the light of current and forecasted financial circumstances: see, for example, In re Anglo American Insurance Ltd [2001] 1 BCLC 755. While the express terms of the scheme are not varied, its commercial effect on creditors is capable of significant later variation.
60. It would be possible to argue that while the scheme itself cannot provide for the amendment of its own terms after it has been sanctioned, there is no such restriction on the amendment of terms of agreements and other documents executed pursuant to the scheme. This would, however, be a somewhat artificial distinction in cases such as the present where the substance of the arrangement is contained in the ancillary documents, as well as in the scheme itself. It would quickly lead to operative provisions being contained in ancillary documents in cases where a power of amendment was appropriate. For these reasons, it was an argument which Sir Thomas Stockdale expressly did not adopt.
61. Sir Thomas Stockdale relied, by way of close analogy, on the decision in Re Broome, Thompson v Broome [1999] 1 BCLC 356. It concerned an individual voluntary arrangement approved by creditors under part VIII of the Insolvency Act 1986 and raised as an issue whether a provision contained in the IVA for subsequent variations to the IVA was valid. It was common ground that such a provision would be effective if contained in a contract, but it was argued that it was inconsistent with the statutory framework which provided important safeguards for creditors in the form of provision of information, approval of the IVA at the creditors' meeting and the right to challenge the IVA by application to the court. Creditors would not enjoy the same safeguards in the event of a later modification of the IVA pursuant to this power. Hart J held that, while a powerful challenge might in particular cases be mounted to the approval of an IVA containing an amendment provision, it was not invalid. This is, in my view, an important decision in the present context. First, if such a provision is valid in an IVA, it is difficult to see why the court cannot as a matter of jurisdiction or principle sanction a scheme of arrangement containing an amendment provision. Secondly, the case for invalidity would, if anything, be stronger in the case of an IVA or a company voluntary arrangement (CVA) which does not require prior sanction by the court. Thirdly, CVAs (to which the decision in Re Broome must apply) and schemes of arrangement are alternative mechanisms for achieving similar results and differences between them should, if possible, be avoided.
62. Mr Phillips submitted that, as a matter either of jurisdiction or perhaps the invariable exercise of discretion, the court would not sanction a scheme which contains a power of amendment operative after sanction or which authorises ancillary documents containing power to amend substantive provisions. The possibility of such amendments going to the heart of the arrangement means that the court may bind members or creditors to substantive provisions which will not be the subject of consideration and approval by the members or creditors or by the court. As Mr Phillips put it, the creditors and the court will have no say on the amendments. Powers of amendment undermine the function of the court when sanctioning the scheme, which is to reach a judgment as to whether the terms of the arrangement are fair as regards the members or creditors affected. Without knowing the terms that will bind the members or creditors, the court cannot make that judgment. By sanctioning the scheme, the court is of course binding not only those who have agreed to it but also those have dissented or abstained.
63. Mr Phillips referred to a passage in the judgment of Lloyd J in In re Equitable Life Assurance Society [2002] 2 BCLC 510 at para 102:

"Paragraph 13.3 of the scheme allows for modifications of or additions to the scheme, and for conditions which the court may approve or impose. One such condition is the giving of an undertaking which I will mention below. Some objectors picked up the idea of a modification and suggested that in this way the scheme could be transformed into something materially different. That is not a permissible approach. The provision is salutary, because there may be some immaterial error or oversight, or change of circumstances, that needs to be corrected or covered. But it would be quite wrong to use the provision so as to foist on a class of creditors something substantially different to what has been approved at the relevant meetings. It is not possible, as one person suggested, for example, to sanction the scheme on terms that the uplifts be treated as being in escrow pending further litigation to clarify the effect of the House of Lords ruling, being released if that litigation showed that the Society's present understanding is correct, but otherwise remaining in escrow pending new arrangements for a 'fairer' distribution."

Although drawing some support from the statement that it would be wrong to use clause 13.3 of the scheme to foist on a class of creditors something substantially different to what has been approved at the meetings, Mr Phillips accepted that the context was very different. There was no provision for post-sanction amendments to take account of changed circumstances and to be made by a process designed to safeguard the interests of creditors. It was an attempt to present a different scheme which had not been put to creditors and to use a provision which had a quite different purpose. Mr Phillips rightly accepted that Lloyd J was not concerned with the present issue and that his judgment cannot provide any real assistance on it.

64. Mr Phillips also referred to a number of Australian authorities. In In re RM Eastmond Pty Ltd [1972] 4 ACLR 801, Street J sitting in the Supreme Court of New South Wales refused to convene a meeting of creditors to consider a scheme of arrangement. Street J explained that it was the practice in New South Wales to consider in detail the provisions of a proposed scheme on the hearing of the convening application. The scheme provided for a moratorium on the enforcement of unsecured debts, for the appointment of a special manager to manage the business of the company subject to the directions of a management committee for which the scheme provided and for the payment of creditors as provided by the scheme. Clause 14(a) provided:

"The Special Manager and the Management Committee shall at all times and from time to time comply with any directions which may be given by the creditors of the Company in meeting where such directions are agreed to by a special resolution at any meeting of creditors held in accordance with the provisions of this scheme."

Clause 20 provided:

"Amendment to Scheme. Subject always to the Company first obtaining such order of the Court as may be appropriate in the circumstances at a meeting of the creditors of the Company called under this Scheme an amendment or amendments of the conditions of the Scheme may be made if agreed to by a majority in number representing three-fourths in value of the creditors of the Company present personally or by proxy and voting at the meeting and in any such case such amendment shall as soon as practicable thereafter be submitted for the sanction and approval of the Court…"

Street J said in relation to these clauses:

"Clause 14: This clause is the subject of a major objection, namely, that within its terms it may well be open to the creditors of the company to give directions which could override provisions of the scheme itself. The special manager and management committee are set up under the scheme with specific powers and authorities. The extent of these powers and authorities is determinable from the scheme itself. No scheme compulsorily imposed under the authority of the court under s 181 should be capable of amendment by machinery internal to the scheme itself.

Clause 20: This clause appears to contemplate a procedure very similar to an independent application under s 181. I have already stated my view that any provision for amendment of the scheme by means internal to the scheme is unacceptable. If an amending or subsequent scheme is at any time to be brought forward, that can be considered and dealt with by a separate application under s 181. It may be that this is what is contemplated by cl 20. If so, cl 20 is unnecessary – s 181 is always available. If, on the other hand, cl 20 purports to permit amendment in some way other than by strict compliance with s 181 in a fresh application, then cl 20 is objectionable, and should be deleted. Whichever be the case, the clause should go out."

65. In In re Leamon Consolidated (Vic) Pty Ltd [1985] 10 ACLR 263, Ormiston J sitting in the Supreme Court of Victoria refused to convene meetings of creditors to consider a scheme of arrangement containing machinery for amendment, unless the relevant provisions were removed. The scheme provided for a moratorium for two years which could be extended to three years. It further provided that the scheme creditors could by special resolution agree to an assignment or composition relating to their debts. Ormiston J was referred to In re RM Eastmond Pty Ltd, to a decision to similar effect in In re Telford Inns Pty Ltd [1985] 3 ACLC 6690 and to a decision to the opposite effect in In re WJ McGrath & Co Pty Ltd [1979] 4 ACLR 451. Ormiston J said:

"…in my opinion it is not appropriate, at least in this case, to give approval in advance for a composition where one cannot predict with reasonable precision what sum will be received by the creditors nor what will be the financial position of the company at the time the composition or arrangement is proposed. That would be giving to a majority of creditors a power to override the minority by a procedure which does not have the added protection of any requirement for court approval.

For better or for worse, the provisions of the Code are designed to protect scheme creditors in these circumstances, and they are designed to protect them by means of the formal procedures laid down under Pt VIII.

The authorities to which I have been referred indicate a general reluctance on the part of the court to empower the creditors to vary a scheme by machinery internal to the scheme. It was argued that this was not a variation or amendment of the scheme. I do not agree. In my opinion no arrangement or composition is presently put forward as one which will be agreed to by the creditors of the company. Moreover I do not think that it is possible at the moment for the creditors to express an informed opinion on a variation or amendment by means of an uncertain arrangement or composition which may be put to them after two or perhaps three years. An arrangement of this kind is very different from the moratorium which in the first place is sought by the scheme, and however clearly it is put to the creditors I do not believe that at present their consent can be on an informed basis. For these reasons I believe the decision in Re Telford Inns Pty Ltd, supra, is more consistent with the policy of the Act than some of the observations in; Re WJ McGarth & Co Pty Ltd, supra,. It may be that the full facts of the latter case justified the order made but for present purposes I do not propose to follow it."

66. In In re NRMA Ltd [2000] 33 ACSR 595, Santow J in the Supreme Court of New South Wales considered a proposed scheme of arrangement which contained provisions for its termination if satisfied conditions subsequent were not satisfied by a stated date. He said at appendix A paras 28-29:

"(28) The use of conditions subsequent to bring about termination of a scheme of arrangement needs to be distinguished from a scheme containing machinery which could lead to variation of its terms. Courts will generally not approve schemes which carry within themselves machinery for variation of their own terms: see, eg, Re RM Eastmond Pty Ltd (1972) 4 ACLR 801; Re Telford Inns Pty Ltd (1985) 10 ACLR 312 3 ACLC 660; Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263. The reason for that is stated in Leamon (at 265):

In my opinion, a scheme … ought not to be approved unless the creditors and the court can see very clearly at the time that the scheme is proposed what it is that they are being asked to accept, and, in the case of the court, what it is that it is being asked to approve.

(29) Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own term, self-executing in the sense that certain results follow in certain defined events."

67. Notwithstanding this dictum, Santow J sanctioned the scheme of arrangement in In re Australian Co-operative Foods Ltd (2001) 38 ACSR 71 with a provision which enabled the company to vary the scheme provided that the variation was (a) not materially prejudicial to the members and debenture holders bound by the scheme, (b) so confirmed by senior counsel, and (c) approved by and lodged with the registrar of cooperatives. At para 85, Santow J accepted that the equivalent of section 425 did not permit the court to amend a scheme after its sanction, but distinguished the provision in the scheme before him:

"However, here this is not an amendment in any way reliant upon those statutory provisions. Nor is it instigated or approved by the court, should those statutory provisions cover such a field. Here, rather, the scheme approved itself contemplates that very flexibility outside of further court discretion. It does so in a manner which could not be said to be inimical to the interests of members, given the safeguards that attend any post-approval variation and the fact that this is to be made clear in the scheme booklet."

68. A very similar provision was contained in the scheme of arrangement in In re Homemaker Retail Management Ltd [2001] NSWSC 1058. Barrett J, in the Supreme Court of New South Wales, required the deletion of the provision before he would sanction the scheme. He referred to In re Australian Co-operative Foods Ltd and continued:

"13. But the clause 7.6 proposed in this case would have gone far beyond any "slip rule". It would have had a very broad operation, accommodating any variation whatsoever which fell within the specification defined by the words "does not adversely affect the rights of Securityholders"…

17. Even if the possibility of alteration has been sufficiently identified and explained, there is still a clear and firm predisposition of the court not to favour provisions allowing schemes to be changed after they have received court approval…

19 Clause 7.6 clearly and unambiguously contemplated the intrusion of a "new decision making process". It was, as I have said, a provision of broad operation carrying within it the potential to bring about alterations to what, in light of the explanatory statement and debate at the scheme meeting, was properly regarded as the defined commercial transaction. And those alterations would have come from decisions of the Company alone. It is not sufficient, in my judgment, for members to have an assurance that any change made will not adversely affect their rights. As I have already outlined, there may well be changes not adversely affecting rights which, for one reason or another, members may still have good reasons not to favour. They are entitled to know that the arrangement which has been presented to them will be the arrangement that is implemented – or, as it was put in Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263, to know when they vote precisely what it is that they are asked to accept. In the extract from NRMA just quoted, Santow J identified clarity and certainty as the touchstones. Both clarity and certainty would, to my mind, have been compromised had clause 7.6 as proposed remained part of the scheme in the present case."

69. Mr Phillips submitted that these Australian authorities demonstrate that, once sanctioned, a scheme of arrangement should not be capable of amendment by an internal decision–making process, so as to alter the commercial arrangements which the creditors and the court have considered. It is inimical to the procedure under section 425.
70. I accept that on the whole the Australian decisions demonstrate, as Barrett J put it, a clear and firm predisposition of the court not to favour amendment provisions in schemes. There will in many cases, probably most cases, be very good reasons against the inclusion of amendment provisions. But I do not read the Australian cases as deciding that the court has no jurisdiction to sanction a scheme containing amendment provisions or that will never in practice sanction such a scheme. The language of most of the judgments, such as paragraph 17 of Barrett J's judgment and the statement of Santow J in In re NRMA Ltd that courts "will generally not approve" such schemes , is inconsistent with reading them in that way. I agree with Hart J in In re Broome when he said of some of these cases:

"Those cases appear to me to be concerned more with the question whether the inclusion of such a clause in a court-approved scheme is a desirable course than with the question whether such a clause if so included would be void ab initio."

This seems also to be the view taken in Australian Corporation Law, Principles and Practice at para 5.1.0105 where the effect of these cases is summarised as follows:

"A provision purporting to allow a company to vary a scheme of arrangement after it had been approved by the court will not usually be approved as it would compromise the need for "clarity and certainty" for members in scheme arrangements as emphasised by Santow J in [NRMA]"

71. Mr Phillips sought to distinguish the decision in In re Broome on the grounds that where a CVA or an IVA contain an amendment provision, the amendment can be challenged by a creditor under section 7(3) or section 263(3) of the Insolvency Act 1986. However, Hart J took the view (at p362 b-d) that this right of challenge does not provide a complete answer but leaves a real difficulty, which nonetheless does not lead to the conclusion that an amendment provision in an IVA is bad ab initio.
72. In my judgment, the court has jurisdiction to sanction a scheme of arrangement which contains provision for future amendment either of the scheme itself or of agreements and other documents to be made pursuant to the scheme. The word "arrangement" in section 425 has a very wide meaning: In re Savoy Hotel Ltd [1981] Ch 351 at 359, Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2006] UKPC 26 at para 25. It is generally accepted that a scheme of arrangement can contain provisions which could be contained in a contract and that the machinery of section 425 is available where individual assent is impossible or not reasonably practicable. It is clear that a contract can contain provisions for subsequent amendments binding on the parties. So, for example, a contract with a syndicate of lenders could provide for subsequent amendments to be binding on the entire syndicate if approved by a specified majority.
73. There are strong reasons why in most cases the court is unlikely to exercise the jurisdiction to sanction a scheme with provisions for future amendments. The factors on which Mr Phillips laid stress, such as the need for creditors and the court to know with clarity and certainty the terms of the arrangement and how they will affect creditors and the obvious possibility that creditors may be content with the arrangement in its original form but not as it is subsequently amended, are strong grounds for not sanctioning a scheme which contains amendment provisions. However, the particular circumstances of a case may make it appropriate to sanction such a scheme, notwithstanding those considerations. I shall not pre-empt a consideration of the fairness of the scheme to be proposed by Cape. However, it is a scheme with unusual features. The need to provide constructively for asbestos-related claims is clear but they are likely to continue for 40 to 50 years. A scheme which seeks to put in place arrangements which will need to exist over such an extended period is unusual, and perhaps unprecedented. It is predictable that there will be legal, medical and financial developments with a significant impact on the arrangement, but it is impossible to know what they will be. There is therefore a clear case for some flexibility. These unusual circumstances, combined with provisions designed to protect creditors, are such that the court may well conclude that it is right to sanction the scheme in its present form. Accordingly, it would not be right to refuse to make orders convening the meetings on the grounds that the scheme or ancillary documents contain provisions permitting their future amendment.

Unfair Contracts Terms Act 1977

74. The issue is raised as to the effect on the proposed scheme of section 2(1) of the Unfair Contracts Terms Act 1977 which provides:

"A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence."

75. "Personal injury" includes any disease: section 14. Section 2 must be read with section 13(1) which provides, so far as material, as follows:

"(1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents –

(a) …

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

(c) …

And (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty."

Unlike other provisions in the Act there is no test of reasonableness which, if satisfied, would save a contract term or notice to which section 2(1) applies. If section 2(1) applies, the term or notice is ineffective, however reasonable or sensible it may be in the particular circumstances of the case.

76. The purpose and effect of the scheme is in large part to transfer the liability to pay any established claim from Cape or other scheme company to CCS. It therefore has the effect of excluding or restricting the right to enforce claims for damages against Cape and the other scheme companies.
77. It was common ground between counsel that a scheme of arrangement sanctioned under section 425 is not a contract or notice within the meaning of section 2(1) of the 1977 Act. Although it may bind the parties to the same extent as if they had made a contract, it is a statutory procedure involving the proposal of the scheme, its approval by the statutory majorities of creditors and its sanction by the court: In re Garner's Motors Ltd [1937] Ch 594 at 598-599, Kempe v Ambassador Insurance Co [1998] 1 WLR 271 at 276.
78. Accordingly, the scheme of arrangement would not be rendered ineffective by section 2(1), as expanded by section 13. However, Mr Pascoe submitted that on three grounds the court would lack jurisdiction to sanction the scheme or would inevitably decline to sanction it.
79. First, he submitted that a scheme of arrangement can do no more than could be done by the parties if they were individually to give their assent to a contract in the same terms. As a contract term to which section 2(1) of the 1977 Act applied would be ineffective, so the court could not sanction a scheme which contained a term to the same effect. This submission, in my judgment, confuses a major purpose of the statutory provisions for schemes of arrangement with the full scope of those provisions. In the great majority of cases, a scheme will give effect to an arrangement with classes of creditors or members which could be achieved by their unanimous assent. This is not however expressed in the statute as a requirement of a scheme of arrangement and there are at least two circumstances where the suggested restriction does not apply. The first is under the Companies Act itself. One of the exceptions to the prohibition in section 151 to the giving by a company of financial assistance for the acquisition of its own shares is contained in section 153(3)(e) which provides that section 151 does not prohibit "anything done in pursuance of an order of the court under section 425". Schemes of arrangement can therefore contain provisions for financial assistance which, if contained in a contract, would not be just ineffective but would involve the commission of a criminal offence and would be illegal and void. It might be said that this is a statutory exception, but it seems odd indeed to have an express statutory exception to a supposed implicit condition of an express statutory procedure. More likely, it is a statutory acceptance that a scheme of arrangement can in appropriate circumstances accomplish more than a contract. This had long been acknowledged in the second case in which the suggested restriction does not apply. Until the Companies Act 1980 introduced the power now contained in section 125(5) of the Companies Act 1985, rights attached to classes of shares which were entrenched in the memorandum of association of a company could not be altered even with the unanimous consent of the members: Ashbury v Watson (1885) 30 ChD 376. Nonetheless, it was established that such rights could be altered by scheme of arrangement: In re J A Nordberg Ltd [1915] 2 Ch 439, The City Property Investment Trust Corporation Ltd, Petitioners 1951 SC 570. In my judgment, the scope of section 425 is not subject to the limitation put forward by Mr Pascoe.
80. Mr Pascoe's second submission was restricted to the effect of the scheme on those creditors whose claims arose from a breach of a contractual duty of care. For the most part these will be present or former employees, who are likely to account for a significant proportion of actual and potential claimants affected by the scheme. Accepting that the scheme was not itself a contract, he submitted that its effect was to vary the contracts of employments by introducing a term to which section 2(1) of the 1977 Act applied. This is not, in my view, the effect of the scheme. It makes provision as to how claims, whether arising in tort or for breach of contract or otherwise, are to be enforced and paid, and does so without any express or implied amendments to any contracts.
81. Mr Pascoe's third submission was that section 2(1) of the 1977 Act applies not only to exclusion clauses of the usual sort but also to compromises. This was in response to a submission of Sir Thomas Stockdale that, even if section 2(1) applied directly or indirectly to a scheme of arrangement, it did not apply to the scheme proposed in this case because it embodied a genuine compromise. I have held that section 2(1) does not apply to a scheme of arrangement, so that strictly this submission is not in point. It would nonetheless be material to a consideration by the court of its discretion to sanction the scheme if it were the case that section 2(1) would render material parts of the scheme ineffective if they were contained in a contract. Even then it would not be decisive. Parliament has not qualified the breadth of the court's discretion under section 425 and, if in all the circumstances the court thought it right to sanction the scheme, it should do so.
82. In Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, Sir Nicholas Browne-Wilkinson V-C had to consider whether a deed of release executed by a company and absolving a bank from any claim or cause of action that the company might have against it in respect of any act prior to the date of the deed was rendered ineffective by the 1977 Act. For the purposes of the present case it is important to note the extent of the release, which related to:

"all claims, demands and causes of action whether or not presently known or suspected ('the claims') that such releasor ever had, may now have, or hereafter can, shall or may have against the releasees or any of them based upon, arising out of or related to any and all acts or omissions of the bank or any other person prior to the date hereof. Each of the releasors understands and agrees that the nature, extent and result of the claims hereby released may not now all be known or anticipated and declares that it nevertheless desires and hereby agrees to settle compromise and release in full all possible claims against the releasees arising from any and all acts or omissions of any releasee or any person or entity prior to the date hereof."

The release was given as part of a transaction under which the bank agreed not to call in existing loans on which the company had defaulted and agreed to provide further finance.

83. It was argued that the release was ineffective by reason of section 10 of the 1977 Act which provides:

"A person is not bound by any contract term prejudicing or taking away rights of his which arise under, or in connection with the performance of, another contract, so far as those rights extend to the enforcement of another's liability which this Part of the Act prevents that other from excluding or restricting."

If applicable, the combined effect of section 10 with section 2(2) would have required the waiver to satisfy "the requirement of reasonableness" to be effective. The Vice-Chancellor held that section 10 in any event applies to a contract between A and B which seeks to restrict or exclude B's right to exercise his rights under his contract with C, and was accordingly inapplicable to the release in the case before him. It was not argued that the release was ineffective by reason of section 2(2) on its own. The Vice-Chancellor's approach to the construction of section 10 was nonetheless based on a more general analysis of the intended scope of the 1977 Act.

84. The Vice-Chancellor said at pp 65-66:

"This argument that section 10 of the Act may apply to compromises or settlement of existing disputes has been foreseen by a number of textbook writers as an unfortunate possibility. They are unanimous in their hope that the courts will be robust in resisting it. If Mr. Sheridan's construction is correct, the impact will be very considerable. The Act of 1977 is normally regarded as being aimed at exemption clauses in the strict sense, that is to say, clauses in a contract which aim to cut down prospective liability arising in the course of the performance of the contract in which the exemption clause is contained. If Mr. Sheridan's argument is correct, the Act will apply to all compromises or waivers of existing claims arising from past actions. Any subsequent agreement to compromise contractual disputes falling within sections 2 or 3 of the Act will itself be capable of being put in question on the grounds that the compromise or waiver is not reasonable. Even an action settled at the door of the court on the advice of solicitors and counsel could be reopened on the grounds that the settlement was not reasonable within the meaning of the Act. If I am forced to that conclusion by the words of section 10 properly construed, so be it. But, in my judgment, it is improbable that Parliament intended that result: it would be an end to finality in seeking to resolve disputes.

The starting point in construing section 10 is, in my judgment, to determine the mischief aimed at by the Act itself. For this purpose, it is legitimate to look at the second report on exemption clauses of the Law Commission on Exemption Clauses (1975) (Law Com. No. 69): see Smith v Eric S. Bush [1990] 1 AC 831 857E, per Lord Griffiths. This report was the genesis of the Act of 1977. The report is wholly concerned with remedying injustices which are caused by exemption clauses in the strict sense. So far as I can see, the report makes no reference of any kind to any mischief relating to agreements to settle disputes."

He concluded at p.67:

"In my judgment, the Act is dealing solely with exemption clauses in the strict sense (i.e. clauses in a contract modifying prospective liability) and does not affect retrospective compromises of existing claims."

85. In the present case, I am not concerned (nor was the Vice-Chancellor in Tudor Grange Holdings v Citibank NV) with a waiver of liabilities arising out of past acts or omission which does not form part of a genuine compromise. Like the Vice-Chancellor, I would find it very surprising if the 1977 Act was intended to apply to a genuine compromise. As the Vice-Chancellor noted, it would subject compromise agreements to the requirements of reasonableness in cases falling within sections 2(2) and 3, with the onus of establishing reasonableness resting on the party relying on the compromise. Even more strangely, it would render any compromise of a claim for death or personal injury ineffective. It would make no sense for Parliament to have enacted provisions to restrict compromises or render them ineffective, which would be so obviously contrary to the clear public interest in promoting the consensual resolution of disputes.
86. There is some indication in the 1977 Act that it is not intended to apply to compromises. Section 15(1), in Part II which applies only to Scotland, provides that Part II:

"does not affect the validity of any discharge or indemnity given by a person in consideration of the receipt by him of compensation in settlement of any claim which he has."

There is no similar provision in the Parts dealing with England and Wales. This absence is not because the Act was intended to apply to compromises in England and Wales but to remove any doubt on this issue under the law of Scotland. This was explained by Lord McCluskey, the Solicitor General for Scotland, when he moved the amendment which introduced the above-cited provision (HL Official Report 7 July 1977 cols 514-515):

"My Lords, may I speak to Amendments Nos. 2 and 3 at the same time. The real purpose of these Amendments is to avoid doubt – to make it clear, in other words, that the validity of any discharge or indemnity granted in settlement of any claim is not affected by any of the provisions in Part II of the Bill. Part II of the Bill contains several provisions which render void or no effect a term of contract which purports to exclude or restrict liability for breach of duty or breach of contract. One finds an example in Clause 16(1) and, indeed, in other clauses.

It is not, of course, intended that controls should apply to any contractual provision which discharges any claim a person may have in respect of any liability which some other person may have incurred in the past. I understand that the problem which we visualise and have sought to cover by this avoidance of doubt provision does not arise in England. In England, the view is taken that what is termed in English Law accord and satisfaction does not include [in context, this must be "exclude"] or restrict any liability arising in future and that it merely operates to discharge a pre-existing liability."

87. Recognising the force of these considerations, Mr Pascoe submitted that, while the 1977 Act may not apply to compromises of existing claims, it does apply to compromises of claims not yet made, even if they arose out of past acts or omissions. In the case of asbestos claims arising out of past exposure this would mean that any claims not yet made, whether in respect of diseases or death which have already occurred or in respect of diseases or death yet to occur, could not be the subject of an effective compromise. Mr Pascoe drew attention to the passages in the Vice-Chancellor's judgment where he refers to compromises of existing claims and contrasts them with the exclusion of future liability. In this context, the terms of the waiver under consideration in that case are important. It applied to future, as well as present, claims and causes of action arising out of past acts or omissions and therefore parallels the scope of the scheme proposed by Cape. There is no suggestion in his judgment that the Vice-Chancellor regarded the waiver as only partially effective.
88. There is in my judgment no substantial reason of policy for distinguishing between compromises of claims already made and compromises of claims which may in the future be made arising out of past acts or omissions, and rendering the latter wholly ineffective. Mr Pascoe relied on the special provisions made in paragraphs 5 of schedule 1 to the 1977 Act for the compensation scheme for mineworkers in respect of pneumoconiosis. Like the Vice-Chancellor (at p.67) I do not think that it provides a second basis for concluding that the Act applies to compromises of all other future claims arising out of past acts or omissions.
89. It is also true that the compromise proposed in the scheme is not the conventional settlement of a disputed claim by the payment of a sum, of the type at which the provision in section 15(1) applicable to Scotland is aimed. It is not settlement of disputed claims at all. Claims will be agreed or adjudicated in the normal way but, instead of being enforceable against a scheme company, they will be enforceable against CCS, which will be funded as provided in the scheme and ancillary documents. Equally, however, the transaction in question in Tudor Grange Holdings Ltd v Citibank NV was not a conventional settlement in that sense, but a complete waiver. Just as there is no good ground for concluding that the 1977 Act applies to the genuine compromise of future claims arising out of past acts but not to the genuine compromise of existing claims, so in my judgment it would be wrong to distinguish between different types of genuine compromise.
90. I therefore conclude that the terms to be contained in the scheme and in the ancillary documents would not, if contained in a contract, be ineffective by reason of the 1977 Act.

Conclusion

91. In the light of my conclusions on the issues raised for decision, there were no grounds for refusing the orders sought by the scheme companies.