THE ISSUES FOR DETERMINATION AT A CONVENING HEARING

Michael Todd QC and Andrew Blake consider the High Court’s recent analysis of the function of the court at the convening hearing in a scheme of arrangement.

A practice has developed in relation to schemes of arrangement, particularly those between a company and its creditors, of asking the court to rule on ‘jurisdictional issues’ or ‘quasi-jurisdictional issues’ at the convening hearing.

In his recent decision in Re Stronghold Insurance Company Ltd [2018] EWHC 2909, Hildyard J has considered the function of the court at the convening hearing.

Background

The development of this practice is, perhaps, not surprising.

The convening hearing provides an opportunity for the proponents of the scheme to seek the court’s approval to a proposed course of action – possibly in the hope that the judge at the sanction hearing will be reluctant to form a view different from that taken at the convening hearing. On the other hand, this approach does provide creditors who are opponents of the scheme with an opportunity to seek to have it halted at an early stage, and before the level of creditor support is tested.

Faced with an insolvent liquidation as the alternative to the scheme, there is already considerable commercial pressure to have the scheme approved. That pressure increases if the scheme is approved by the requisite statutory majorities and opposed by only a few dissentient creditors.

In some cases, judges have expressed views as to whether particular issues may legitimately be raised at the convening hearing. However, problems arise if the range of issues which may be raised is not defined with sufficient clarity.

In Stronghold, Hildyard J considered the practice which had developed as a result of the Court of Appeal’s decision in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241. Of that practice, he said:

“This has proved a popular change from previous practice, and I return to it later in this judgment to make some general points as to its consequences. I would note one in the meantime, since it does appear to me to have caused some confusion: this is that the focus on the jurisdictional issue of class composition which the present practice brings at the first stage has gradually encouraged a perception that the court at this first stage will also address other matters going to its jurisdiction, following the same rationale. That is not quite accurate; nor is the related and (in my experience) increasing tendency to suggest to a judge at the sanction stage that the fact that class meetings have been directed carries with it the implication that the judge at the first stage was satisfied as to other matters bearing on the jurisdiction of the court.” (emphasis added)

S 896(1) CA 2006

The starting point for any consideration of the purpose of, and business to be conducted at, the convening hearing is, of course, s 896(1) CA 2006. That section provides:

‘The court may, on an application under this section, order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), to be summoned in such manner as the court directs.’

Whether or not the court will order any meeting is clearly a matter for the exercise of the court’s discretion. So which issues, or types of issue, will the court entertain and determine at the convening hearing (which may result in the court refusing to order the convening of a creditors’ meeting)?

One may perhaps be forgiven for thinking that, before it orders the convening of a meeting, the court must be satisfied that it has jurisdiction to do so, ie that the court is satisfied:

a) that it has jurisdiction: (i) over the company proposing the scheme, and (ii) in relation to the compromise or arrangement which is the subject matter of the scheme, and

b) of its ability to sanction the scheme, if the necessary majorities are obtained at the relevant class meeting(s).

This has never been the court’s function at the convening hearing. Nevertheless, the scope of court’s function at the convening stage has developed over time.

The practice before Hawk

Prior to Hawk, the practice of the court at the convening hearing had been simply to give directions (if and as appropriate) for the convening and holding of the necessary creditor (or member) meetings to consider, and, if thought fit, approve the scheme.

That practice had been based upon a Practice Note (1934) WN 142 issued by Eve J, which provided that any objection to class composition “must be taken on the hearing of the petition for sanction, and the applicant must take the risk of having it dismissed”.

As Hildyard J observed in Stronghold, consistent with that Practice Note: (a) the identification of the appropriate class meetings was, and is, initially a matter for the proponents of the scheme; (b) before Hawk, it was not the court’s practice to give any provisional view as to the class composition proposed; and (c) issues as to the appropriateness, or otherwise, of class composition were left to be determined at the sanction hearing.

Hawk

Hawk brought about a fundamental change in the practice of the court. That change resulted from concerns expressed by Chadwick LJ that “if the correct decision is not made [as to class composition] at the [convening hearing], the court may find, at the [sanction hearing], that it is without jurisdiction”. However, leaving the question whether or not those were the meetings the scheme actually required until the sanction hearing might result in a considerable waste of time and expense. Chadwick LJ therefore recommended that the practice be re-examined.

The Practice Statement

The practice was re-examined, and the current practice is set out in Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345.  The Practice Statement: (a) deals with class composition; (b) makes provision for the determination of any creditor issues; and (c) most importantly, provides that while a creditor who considers that the scheme treats them unfairly can appear at the sanction hearing to oppose sanction, the court will expect any such creditor to show good reason why they did not raise any class issues at an earlier stage.

It is the last two points which are of real significance for the present purposes, as they provide the basis for opponents of a scheme to raise ‘jurisdictional’ and ‘quasi-jurisdictional’ challenges at the convening stage.

Jurisdictional and quasi-jurisdictional challenges

As outlined above, views have been expressed on the matters the court will entertain and determine at the convening hearing.

In Re Indah Kiat International Finance Co BV [2016] EWHC 246 (Ch) (at para 28), Snowden J observed that:

“The convening hearing also provides the opportunity for any other issues to be raised that go to jurisdiction or which would unquestionably lead to the court declining to sanction the scheme. The aim is to avoid the waste of time and money that would occur if scheme meetings were convened and held on an incorrect basis or where there is some other fundamental roadblock to the scheme: see per David Richards J in Telewest Communications plc (No.1) [2004] EWHC 924 (Ch) at paragraph 14, and Re T&N (No.3) [2007] 1 BCLC 563 at paragraphs 18-20.” (emphasis added)

In Re Noble Group Ltd [2018] EWHC 2911 (Ch) Snowden J commented (at para 62):

“The primary function of the convening hearing is to consider the question of the proper formulation of classes for the scheme meeting(s) that the court is being asked to order be convened… It is not, however, limited to that issue: other jurisdictional or quasi-jurisdictional issues may be raised.” (emphasis added)

That reflects the view expressed by David Richards J in Re T&N Ltd (No. 4) [2006] EWHC 1447 (Ch) (at para 19):

“The purpose underlying this revised practice shows that if there are known to be other issues which would go to the jurisdiction of the court to sanction the scheme, they too are best raised at the stage of the application to convene the meetings: see In re Savoy Hotel Ltd [1981] Ch 351 and In re MyTravel Group plc [2005] EWCA Civ 1734. The same is also true of issues which, although not strictly going to jurisdiction, are such that they would unquestionably lead the court to refuse to sanction the scheme.” (emphasis added)

This was acknowledged by Hildyard J in Stronghold:

“In the result, the practice was swiftly changed, and it has since become the practice to consider matters of class composition, along with any other identified potential reasons for the court lacking jurisdiction, at this first hearing.” (emphasis added)

Scope of challenge

Does this mean that any jurisdictional or quasi-jurisdictional challenge may be raised at the convening hearing? Notwithstanding those encouraging statements, the answer to that question is, emphatically, no.

For example:

(a)   the courts have said, consistently, that the sanction hearing is “emphatically not a hearing to consider the merits and fairness of the scheme(s)”: Re Telewest Communications plc (No.1) [2004] EWHC 924 (Ch) per David Richards J (at para 14); Stronghold (at para 34); and

(b)  in NobleSnowden J commented that he did not think it would always be appropriate for the court to agree to decide jurisdictional issues at the convening hearing. This was especially so where the issues involved consideration of factual evidence and/or the exercise of discretion as to whether it would be appropriate for the court to exercise its jurisdiction in international cases.

In Re APCOA Parking (UK Ltd) [2014] EWHC 997Hildyard J emphasised the limited function of the court at the convening hearing. He said (at para 12) that the only purposes of the hearing are:

(a)   to determine whether the classes selected for consideration of the scheme are appropriate; and

(b)  whether there are presently apparent jurisdictional impediments to the scheme such as to demonstrate, even at this preliminary stage, that it is unlikely that the scheme could properly and effectively be sanctioned by the court, whatever might be the decision at the class meetings which are convened.

Hildyard J continued (at paras 15–16):

“… it is now at this first stage, the scheme meetings stage, that the court offers the company and its creditors an opportunity to ventilate any concerns as regards the proposed classes and for the court itself to raise concerns in that regard or in regard to its jurisdiction.

“In doing so the court does not and could not bind itself as regards the sanctions hearing, even on issues relating to class constitution or its jurisdiction. Nothing I say today can resolve ultimately the question of whether the classes and class meetings are properly constituted and whether the court has jurisdiction… (in both the narrow and broader sense).” (emphasis added)

As indicated above, he returned to that theme in Stronghold.

Analysis

If Hildyard J’s observations in Stronghold were taken as representing the current approach of the court, that would undermine very substantially the practice which has developed, since Hawk, of determining jurisdictional or quasi-jurisdictional issues at the convening hearing where it is clear that the court cannot, or will not, sanction the scheme in due course at the sanction hearing. An indication from the court at the convening hearing as to the existence of a potential roadblock may (if accepted) save time and costs; in contrast, any preliminary (but ultimately incorrect) indication of an apparent roadblock may well increase time and costs. If that truly were the approach at the convening hearing, it would be more an exercise in identifying possible chicanes, rather than ascertaining whether there are any roadblocks. It would deprive the practice of any element of real substance or certainty.

But this does not represent the current approach.

Indeed, in T&N (No. 4), David Richards J determined (in a reasoned decision) at the convening hearing the question whether a scheme (which included a compromise of claims by employees against the scheme company’s insurers) fell within s 425 CA 1985 (a statutory predecessor to s 895 CA 2006), together with questions of whether the scheme infringed the Employers’ Liability (Compulsory Insurance) Act 1969. However, those issues were not dependent upon any factual evidence or any discretionary considerations, and they did permit a ‘yes/no’ answer.

Similarly, at the convening hearing in Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch), David Richards J held (in a reasoned judgment) that the English court would have jurisdiction to sanction the scheme between a Vietnamese company and its finance creditors under an English law governed facility, and that there was a sufficient connection between the scheme and England such that there was a “reasonable prospect” that the court would (all other tests being met) exercise its discretion to sanction the scheme.

In Stronghold (at para 32) (and notwithstanding his apparent reluctance to determine jurisdictional or quasi-jurisdictional issues at the convening stage), Hildyard J was prepared to recognise that other jurisdictional issues could be considered at the convening hearing, provided interested parties are given proper notice of the points to be raised and subject to the following observations:

(a)   if the court is to be invited to determine a jurisdictional issue in a way which can be relied on as a basis for persuading the judge at the sanction hearing not to revisit the question:

(i)                 that must be very clearly brought to the attention of the judge at the convening hearing; and

(ii)               the judge should be invited to provide a judgment in that regard, so that there can be no doubt as to the basis on which that issue was addressed (see also Noble (at para 75); Re Van Gansewinkel Groep BV [2015] EWHC 2151 (Ch));

(b)  even then, since it goes to jurisdiction, a decision at the convening hearing does not bind the court at the sanction hearing (while recognising, of course, that the court is unlikely to depart from a reasoned conclusion at an earlier stage without change of circumstance or very good reason); and

(c)   the court is unlikely to wish to deal with issues involving a discretionary element or value judgment.

Comment

Recent judicial observations as to the matters the court will consider and determine at the convening hearing would suggest that the position is as follows:

(a)   the court will consider and determine objections to class composition;

(b)  class composition is a matter for the jurisdiction of the court and so, although it is likely that the judge at the sanction hearing will follow a reasoned judgment of the judge at the convening hearing, the court is not bound to accept jurisdiction at the sanction hearing;

(c)   the court (albeit with varying degrees of enthusiasm) will in addition consider and determine any other jurisdictional or quasi-jurisdictional issues which would unquestionably lead to the court declining to sanction the scheme, sometimes referred to as ‘blots’ on the scheme or roadblocks to its progress;

(d)  however, save as mentioned above, the court will not readily entertain or determine issues:

(i)                 which go to the merits and fairness of the scheme;

(ii)               which are dependent upon factual evidence or involve discretionary considerations; or

(iii)              do not permit a ‘yes/no’ answer.

In Noble, Snowden J concluded (at para 76):

“What I do think that a scheme company can legitimately ask at the convening stage is for the court to indicate whether it is obvious that it has no jurisdiction to sanction the scheme, or whether there are other factors which would unquestionably lead the court to refuse to exercise its discretion to sanction the scheme. This is often described as the question of whether there is a ‘roadblock’ in the way of the Company. That was, I think, the real thrust of the points being made by David Richards J in T&N and by Hildyard J in APCOA.”

That ‘intermediate’ approach appears to have been adopted by Zacaroli J in Re The Royal London Mutual Insurance Society Ltd [2018] EWHC 2215 (Ch)In that case, the judge had to consider whether proposed variations in rights under insurance policies under a creditors’ scheme might result in possible contravention of the Equality Act 2010. He held that, although he had not heard argument other than on behalf of the company, and so had not heard from anyone who might oppose the conclusion he had reached, there was no sufficient ‘blot’ to prevent the scheme being put to the creditors’ meeting.

This case feature was first published in FromCounsel‘s Corporate Briefing on 20 August 2019.

Barristers
Michael Todd QC
Andrew Blake