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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 >> Old Mutual Plc, Re [2018] EWHC 873 (Ch) (20 April 2018) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2018/873.html Cite as: [2018] EWHC 873 (Ch), [2018] WLR(D) 248

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IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)

IN THE MATTER OF THE COMPANIES ACT 2006

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		20 April 2018

MR JUSTICE SNOWDEN :

Introduction

1. This is an application by Old Mutual plc (the "Company") under section 896 of the Companies Act 2006 ("CA 2006") for permission to convene meetings of its members for the purpose of considering and, if thought fit, approving two schemes of arrangement (the "First Scheme" and "Second Scheme" and, together, the "Schemes").
2. As described below, the Company is the parent company of a group (the "Group") which carries on a range of wealth management, financial services and banking businesses in the UK, USA and Africa. Following a strategic review of these businesses, the directors of the Company have decided to split the Group into four separate businesses in order to enhance shareholder value. This proposed split has been referred to as the "Managed Separation" and the Schemes form part of the arrangements to effect the Managed Separation.
3. The primary purpose of the First Scheme is to demerge Quilter plc ("Quilter"), a wholly-owned subsidiary of the Company which carries on a wealth management business in the UK. This demerger is to be effected by means of a reduction of the Company's share capital and cancellation of its share premium account (the "Demerger Reduction") which will create distributable reserves. Part of these distributable reserves will be used to make a distribution in specie of shares in Quilter to the Company's members. The First Scheme also reclassifies some of the ordinary shares in the Company and transfers some shares to nominees for the relevant shareholders in preparation for the operation of the Second Scheme.
4. The purpose of the Second Scheme is to make a South African company, Old Mutual Limited, the new holding company of the Company and the remaining Group ("New Holdco"). The Second Scheme provides for all of the shares in the Company after the operation of the First Scheme either to be cancelled or transferred directly to New Holdco. The reserve arising on the cancellation of the shares will be applied in paying up new shares in the Company which will be issued to New Holdco. As consideration for the cancellation or transfer of their shares under the Second Scheme, the members of the Company immediately prior to the operation of the Second Scheme will receive one share in New Holdco for every share held by them.
5. Applications under s 896 CA 2006 for permission to convene scheme meetings in relation to members' schemes are usually dealt with by Insolvency and Companies Court Judges (formerly known as Companies Court Registrars) rather than Judges of the High Court. However, the courts have recognised that, by a broad analogy with the practice laid down for class constitution in creditor schemes in Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345, if points of specific concern arise in members' schemes, it may be appropriate to list such applications before a High Court Judge.
6. In the present case, the Company has applied to a High Court Judge because it seeks reassurance in relation to the following two issues:

i) that the reductions of capital involved in the Schemes are not barred by section 641(2A) CA 2006; and

ii) that there is no real likelihood that the Demerger Reduction under the First Scheme will result in the Company being unable to discharge liabilities owed to creditors and, accordingly, that it will be appropriate in due course for the Court to make an order under section 645 CA 2006 dispensing with settlement of a list of creditors.

7. I consider that to be an entirely sensible and appropriate course for the Company to take so as to avoid any wasted time and expense were it to turn out to be the case that the court later took a different view to that of the Company on these key points. However, it should be noted that the application has not been advertised or the subject of any Practice Statement letter (as would be required for a creditors' scheme). In particular, HMRC were not given formal notice of the application or intention to raise the issue over section 641(2A) CA 2006. I have, however, seen evidence that HMRC have been made aware of the proposed Schemes and have been informed of the debate which took place at the first hearing of the application, and have indicated that as things stand they do not anticipate making any submissions to the court on the issue. Nor has specific notice of the application in relation to the proposed Demerger Reduction been given to any creditors of the Company, although the intention to carry out the Managed Separation has been in the public domain since 2016 and some details of the Demerger Reduction were included in the Company's Annual Report and Accounts to 31 December 2017 which were published on 15 March 2018. Any reassurance which the court can give at this stage must, therefore, be necessarily provisional and not binding on any interested parties.

The Commercial Background

8. The predecessor to the Group was founded in 1845 as South Africa's first mutual life insurer known as the South African Mutual Life Assurance Society ("Old Mutual Society"). In the 20^th century, Old Mutual Society expanded into other African countries. In 1973, it acquired a majority stake in a South African bank, Nedbank.
9. In 1999, the Old Mutual Society de-mutualised. Members of the Old Mutual Society received shares in the Company which were listed on the London and Johannesburg stock exchanges, as well as the stock exchanges in Malawi, Namibia and Zimbabwe.
10. The global financial crisis in 2007-8 presented serious challenges for the Group and led to the decision of the Company's board to restructure the Group in 2010. A number of businesses were sold, leaving the Company with interests in four underlying businesses. These are:

i) Quilter (formerly known as Old Mutual Wealth), which carries on a wealth management business in the UK;

ii) OMEM (Old Mutual Emerging Markets Limited and its subsidiaries), which carries on a financial services business principally in sub-Saharan Africa;

iii) a 52% stake in Nedbank, which is currently the fourth largest bank in South Africa; and

iv) OMAM (formerly known as OM Asset Management plc) which carries on an asset management business focussed on the institutional market in the USA.

11. In November 2015, the new CEO of the Company initiated a strategic review of the Group. This review identified that the Group had four strong businesses each of which had good prospects and was capable of operating independently, but there was a lack of strategic logic for holding the businesses together, and no material synergies between them. As a result of this review, the board of the Company decided that it would be in the best long-term interests of shareholders and other stakeholders to effect the Managed Separation.
12. As part of the Managed Separation, during 2016 and 2017 the Company reduced its stake in OMAM from its 65.8% holding at the time of the announcement of the separation to 0.0009%. The Company also disposed of some non-core businesses such as Old Mutual Wealth Italy.
13. The remaining process for the Managed Separation will involve the following components:

i) Shareholders in the Company will become shareholders in Quilter by means of the First Scheme. Quilter will carry on the Group's UK wealth management operations. Quilter shares will have their primary listing in London and a secondary listing in Johannesburg.

ii) New Holdco will become the holding company of the Company by means of the Second Scheme. Its shares will have their primary listing in Johannesburg, a standard listing in London and further secondary listings on the stock exchanges in Malawi, Namibia and Zimbabwe. This new group will carry on the Group's emerging markets operations.

iii) At some future date, expected to be at about the end of 2018, a proportion of the shares in Nedbank will be distributed to the shareholders of New Holdco, reducing the new group's majority shareholding to a minority stake of 19.9%. This step is described in the draft Scheme circular as the "Nedbank Unbundling."

14. At present, having four very different businesses focussing on different geographical and business areas under a single group listing of the Company means there is a misalignment of the location of its shareholders with those businesses. The board has expressed the view that the Managed Separation described above will give the opportunity for shareholders of the Company to retain or dispose of shares so that the individual businesses become more geographically aligned to those shareholders who are best able to understand, value and invest in them.

The First Scheme

15. As noted above, the purpose of the First Scheme is to demerge Quilter from the Company. This is to be achieved by means of the Demerger Reduction to create distributable reserves, part of which will then be used by the Company to make a distribution in specie to shareholders of Quilter Shares.
16. The Company's ordinary shares currently have a nominal value of 11 3/7 pence each. The nominal value of each Scheme Share will be reduced to 0.1 pence and capital will be cancelled to the extent of 11 23/70 pence upon each Scheme Share. Further, the balance of £1.0 billion (as at 5 April 2018) standing to the credit of the Company's share premium account will be cancelled. As consideration for the Demerger Reduction, the Company's shareholders will receive one Quilter Share for every three shares in the Company held by them.
17. The Company currently holds 96.2% of the total issued share capital of Quilter. The Company will transfer 86.6% of such share capital to its shareholders under the First Scheme. Following the First Scheme becoming effective, the Company will hold approximately 9.6% of the total issued share capital of Quilter, which it intends to place shortly after the demerger by way of a secondary placement to institutional investors, with a small amount reserved for sale to non-executive directors of Quilter and the Company at the same offer price as under the secondary placing (the "Quilter Share Sale"). The Quilter Share Sale will take place outside the Schemes. The remaining 3.8% of the total issued share capital of Quilter will be maintained by a trustee of certain existing share plans established by Quilter, on behalf of certain management and staff of Quilter.
18. The second part of the First Scheme provides for the transfer of certain shares in the Company to custodian companies which will hold the shares as nominees for the respective transferors as beneficial owners. The shares to be transferred are (i) those held in uncertificated form in CREST which will be transferred to a UK custodian company; (ii) those held in certificated form on the Namibian section of the Company's UK register which shall be transferred to a Namibian custodian company; and (iii) those held in certificated form on the Company's South African register which will be transferred to a South African custodian company. The purpose of such transfers is to overcome a number of technical restrictions imposed by CREST and in South Africa, and liquidity concerns over the Namibian stock exchange. The stated effect will be to enable the relevant shareholders to receive shares (or interests in shares) in New Holdco under the Second Scheme in a form most closely resembling the form in which they currently hold shares in the Company and in which they can be traded and settled on the relevant stock exchange.
19. Further, under the First Scheme, the Ordinary Shares in the Company which are entered only in the Company's principal register of members in the UK (other than shares registered in the name of a Swedish nominee, Euroclear Sweden AB) will be reclassified into "A" Ordinary Shares. This reclassification of share capital affects the manner in which shares in the Company will be dealt with under the Second Scheme. Those shares which have been reclassified as "A" Ordinary Shares will be cancelled pursuant to the Second Scheme, while those shares which remain as Ordinary Shares will be transferred directly to New Holdco.
20. The reason for transferring Ordinary Shares under the Second Scheme is to mitigate the risk that, if shares held by the Swedish nominee, or by shareholders entered in the Company's branch registers in South Africa, Zimbabwe and Malawi are cancelled, this will trigger a tax charge for those shareholders. However, there is no risk of that tax charge arising if the shares held by such shareholders are transferred.
21. Importantly, the First Scheme is not expressed to be conditional upon the Second Scheme. Instead, it contains two clauses under which the transfer of shares to nominees and reclassification will both be reversed if the Second Scheme does not become effective by 6.00 pm on the tenth business day after the relevant step in question of the First Scheme. Accordingly, in circumstances where the Second Scheme does not become effective, the only effect of the First Scheme will be to achieve the demerger of Quilter.

The Second Scheme

22. The purpose of the Second Scheme is to insert New Holdco as the new South African holding company of the Company and the Group so as better to reflect the nature of the business of the revised group and to facilitate regulation of that business by the South African regulator.
23. Under the Second Scheme, "A" Ordinary Shares in the Company will be cancelled (the "Cancellation Reduction") and the reserve arising in the Company's books of account as a result of the cancellation will be capitalised and applied in paying up at par such number of new Ordinary Shares as equals the aggregate number of "A" Ordinary Shares cancelled. These new Ordinary Shares will be allotted and issued to New Holdco. Any remaining Ordinary Shares in the Company will simply be transferred to New Holdco. Regardless of whether a member holds "A" Ordinary Shares or Ordinary Shares, the consideration payable by New Holdco remains the same: for every one "A" Ordinary Share cancelled or one Ordinary Share transferred, a member will receive one New Holdco share.
24. It is intended that one deferred share of 10 pence in the capital of the Company will be issued to New Holdco for cash prior to the record time for the Second Scheme. This is to ensure that, when new Ordinary Shares are issued to New Holdco as described above, they are issued to a member of the Company in accordance with section 593(2) CA 2006, thereby rendering a valuation under section 593(1) unnecessary.

The Scheme Meetings and Procedural Chronology

25. The Company proposes that there should be two separate scheme meetings, albeit held sequentially on the same day and in the same place. It is proposed that the meeting for the First Scheme will be of a single class of the members of the Company on the share registers as at 6 pm London time two business days before the date of the meeting (the "Voting Record Date"). The meeting for the Second Scheme will be of the same persons, even though by the time that the Second Scheme subsequently becomes effective, some of those shareholders will have ceased to be members of the Company and will have had their shares transferred to nominees pursuant to the First Scheme.
26. There will also be two separate Court hearings to sanction the Schemes. The hearing to sanction the First Scheme is intended to occur on Wednesday 20 June 2018. The last day for trading in the Company's shares on the London Stock Exchange (and those in Johannesburg, Namibia and Zimbabwe) will be Friday 22 June 2018. The record time for the First Scheme will be at 6.30 pm on that day, shortly before the First Scheme is made effective at 7.00pm.
27. Over the weekend the Company will process the trades which have occurred up to the end of trading. Prior to the start of trading in London on Monday 25 June 2018, the demerger of Quilter will take effect and, at or after the commencement of trading, the transfers and reclassification of the Company's shares will be carried out. The Company's shares will also be suspended from trading and the new shares in Quilter will be admitted to the London Stock Exchange to enable trading to commence when the markets open.
28. The hearing to sanction the Second Scheme will then take place on Monday 25 June 2018 and, if sanctioned, the Second Scheme will become effective that evening. The shares in New Holdco will then be admitted to the London Stock Exchange to enable trading to commence on Tuesday 26 June 2018.

Section 641(2A) CA 2006

29. Sections 641(2A) – (2C) CA 2006 provide,

"641(2A) A company may not reduce its share capital under subsection (1)(a) or (b) as part of a scheme by virtue of which a person, or a person together with its associates, is to acquire all the shares in the company or (where there is more than one class of shares in a company) all the shares of one or more classes, in each case other than shares that are already held by that person or its associates.

(2B) Subsection (2A) does not apply to a scheme under which -

(a) the company is to have a new parent undertaking,

(b) all or substantially all of the members of the company become members of the parent undertaking, and

(c) the members of the company are to hold proportions of the equity share capital of the parent undertaking in the same or substantially the same proportions as they hold the equity share capital of the company.

(2C) In this section -

"associate" has the meaning given by section 988 (meaning of "associate"), reading references in that section to an offeror as references to the person acquiring the shares in the company;

"scheme" means a compromise or arrangement sanctioned by the court under Part 26 (arrangements and reconstructions)."

30. The background to the introduction of these provisions was explained in paragraph 7 of the Explanatory Memorandum (the "BIS memorandum") prepared by the Department for Business, Innovation & Skills in connection with The Companies Act 2006 (Amendment of Part 17) Regulations (SI 2015 No. 472) in the following terms,

"7.1 Takeovers and mergers are given effect either by a contractual offer to the target company's shareholders to purchase their shares, or by means of a scheme of arrangement, a long-established court sanctioned process for making changes to a company's share or debt structures.

7.2. In the context of takeovers, there are two main types of schemes of arrangement: a 'transfer' scheme sees the transfer of shares in the target company to new owners; a 'cancellation' scheme sees a reduction of the target company's share capital (as governed by Part 17 of the Companies Act 2006) and the issue of new shares to the new owners. Stamp taxes on shares are charged on the transfer of shares but not on the issue of new ones. So implementation of a 'transfer' scheme requires payment of tax (at 0.5% of the consideration paid for the shares) but no such liability flows from implementation of a 'cancellation' scheme.

7.3 Takeovers of UK public companies are increasingly being carried out via 'cancellation' schemes of arrangement, thus not incurring the stamp taxes on shares liability. The Government believes that all takeovers should be treated equally in tax terms, and is therefore taking action to close what is effectively a tax loophole. This is being achieved through a targeted amendment to section 641 of the Companies Act 2006 that will prevent a company from reducing their share capital alongside a 'cancellation' scheme of arrangement to facilitate its takeover. It will still be possible to effect a takeover by means of a 'transfer' scheme of arrangement.

7.4 The Government recognises that there are other situations where a scheme of arrangement and/or a reduction of capital may be appropriate such as intra-group restructuring, de-mergers, rescheduling debt or returns of capital. This instrument therefore includes a specific exemption for circumstances where the acquisition amounts to a restructuring that inserts a new holding company into the group structure, where shareholders of the new holding company have not changed substantially from the shareholders of the company undertaking the scheme of arrangement."

Analysis

31. The two Schemes form part of the Managed Separation and, for understandable commercial reasons, are recommended to the Company's shareholders as a package. However, in legal terms the Company has decided to propose two separate Schemes. If looked at separately, it is in my judgment clear for the following reasons that the prohibition in section 641(2A) is not infringed in relation to the First Scheme at all, and the prohibition is disapplied by virtue of section 641(2B) in relation to the Second Scheme.
32. The prohibition does not apply to the Demerger Reduction in the First Scheme because the First Scheme is not a scheme by virtue of which any person is to acquire all of the shares in the Company so as to engage the terms of section 641(2A). The demerger of Quilter is followed by the transfer of some (but not all) of the Company's shares to custodians and the reclassification of the majority (but not all) of the Ordinary Shares entered on the Company's UK register of members as "A" Ordinary Shares.
33. Section 641(2A) does potentially apply to the Cancellation Reduction in the Second Scheme because the Second Scheme is a scheme by virtue of which all of the shares in the Company (apart from the deferred share which will already be held by New Holdco) will be acquired by New Holdco. However, I consider that section 641(2A) is disapplied by section 641(2B) because under the Second Scheme (a) the Company is to have a new parent undertaking (New Holdco); (b) all of the members of the Company (including the relevant nominees) will become members of New Holdco; and (c) such holders of the Ordinary Shares and "A" Ordinary Shares will be issued new shares in New Holdco on an equal basis so that they will hold the new equity shares in New Holdco in the same proportions as they hold their shares in the Company.
34. The issue that has concerned the Company is whether it might be said that the court should treat the two Schemes as one composite scheme, and if so, whether that would result in section 641(2A) CA 2006 being infringed.
35. Whilst arguing that this should not be so, Mr. Moore QC identified that the basis for such an approach by the Court might arguably be the application of the principle developed in the well-known line of cases commencing with WT Ramsay v IRC [1982] AC 300 ("Ramsay") and including Furniss v Dawson [1984] AC 474, IRC v McGuckian [1997] 1 WLR 991 ("McGuckian") and MacNiven v Westmoreland Investments [2003] 1 AC 311 ("MacNiven").
36. Ramsay concerned a tax avoidance scheme which created an allowable loss for the taxpayer as part of wider plan which involved using that loss to cancel out what would otherwise have been a taxable gain. At pages 323-324, Lord Wilberforce observed,

"Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of IRC v Duke of Westminster [1936] AC 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded."

37. This so-called Ramsay principle has since been applied in non-tax cases. This was explained in the Court of Final Appeal of Hong Kong in Collector of Stamp Revenue v. Arrowtown Assets Limited, FACV No. 4 of 2003 ("Arrowtown"), and more recently in the decision of the Supreme Court in UBS AG v HMRC [2016] UKSC 13 ("UBS").
38. In Arrowtown, Mr. Justice Ribeiro PJ said, at [31],

"31. The … preferable, view is that the Ramsay principle does not espouse any specialised principle of statutory construction applicable to tax legislation, whatever its language, but continues to assert the need to apply orthodox methods of purposive interpretation to the facts viewed realistically…."

39. After finding support for that approach in McGuckian and MacNiven, Mr. Justice Ribeiro PJ concluded, at [35],

"35. Accordingly, the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically. Where schemes involve intermediate transactions having no commercial purpose inserted for the sole purpose of tax-avoidance, it is quite likely that a purposive interpretation will result in such steps being disregarded for fiscal purposes. But not always. MacNiven is a good example of a case where a purposive interpretation of the statute and its application to the facts did not dictate excluding the taxpayer's payment of interest from the statutory provision treating such payments as deductible charges on income…."

40. In UBS, Lord Reed (with whom the other members of the Supreme Court agreed) referred with evident approval to Mr. Justice Ribeiro PJ's judgment in Arrowtown and summarised the principle at [65],

"65. … there have been a number of cases since Ramsay in which it was decided that elements inserted into a transaction without any business or commercial purpose did not prevent the composite transaction from falling within a charge to tax, or bring it within an exemption from tax, as the case might be…. In each case the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief…."

41. Applying that approach to the instant case, it seems to me, first, that the evident legislative purpose of sections 641(2A) – (2C) CA 2006 was not to prevent or restrict reductions of capital of the type included within the Schemes in this case.
42. As indicated very clearly in paragraph 7.3 of the BIS memorandum, the "targeted" purpose of the introduction of the sections was to close a specific tax loophole in relation to the use of a reduction of capital in a "cancellation" takeover scheme so as to avoid the payment of stamp duty on a transfer of shares to the bidder. However, as paragraph 7.4 of the BIS memorandum makes clear, the legislature did not intend to outlaw or restrict reductions of capital used in conjunction with transactions such as intra-group restructurings or demergers. Accordingly, there is to my mind no doubt that because the transactions envisaged by the Schemes and the Managed Separation of the Group are intra-group transactions which do not involve an external takeover of the Company, they do not exhibit the mischief to which the amendment of the CA 2006 was directed; and they fall squarely within the type of transactions which are not intended to be prohibited.
43. Secondly, to the extent that the cases have tended to concentrate upon the use in composite transactions of what Mr. Justice Ribeiro PJ termed "intermediate transactions having no commercial purpose inserted for the sole purpose of tax avoidance", or what Lord Reed called "elements … inserted without any purpose other than tax avoidance", I do not consider that this would properly describe either of the Schemes proposed by the Company.
44. Instead, it is clear that the First Scheme serves the primary and legitimate commercial purpose of achieving the demerger of Quilter; and the Second Scheme serves the legitimate commercial purpose of placing a South African holding company above the revised group so as to facilitate the regulation of its remaining business in Africa by the South African regulators. Each of the Schemes therefore serves a separate and very real commercial purpose.
45. Further, although the Company naturally wishes to carry out the entire Managed Separation, it is possible for the First Scheme to be carried into effect independently of the Second Scheme. In particular, the demerger of Quilter under the First Scheme is not conditional upon the Second Scheme being approved. Moreover, although the First Scheme contains provisions for the transfer to nominees and reclassification of the shares in the Company so as to set the scene for the operation of the Second Scheme, the First Scheme also contains the "unwind" provisions which would reverse the transfer to nominees and reclassification of shares in the event that the Second Scheme does not become effective.
46. Finally, and as a commercial matter, it was made clear to me by Mr. Moore QC that the Company would wish to achieve the demerger of Quilter irrespective of whether it is able to insert New Holdco as the South African holding company of the revised group.
47. In my judgment, those points are sufficient to resolve this issue in favour of the Company. In short, notwithstanding the approach in the Ramsay line of cases, I see no reason in the legislative policy or in any appeal to "realism" to treat the separate Schemes in any other way than they have been presented to the court.
48. I also derive some support for that conclusion from the decision by Newey J in relation to section 641(2B) in Re Home Retail Group plc [2017] BCC 39. In that case, admittedly on a different type of scheme, Newey J decided that the Ramsay principle would not bite "on a cancellation scheme which is part of a real world transaction having a clear commercial and business purpose".
49. As an alternative or fall-back position, Mr. Moore QC also argued that even if the Schemes had "realistically" to be regarded as one composite scheme, sections 641(2A) and (2B) should be interpreted "purposively" rather than literally, so that the reductions contained therein should not be prohibited.
50. The problem which arises in this respect is that on the literal reading of section 641(2A), a composite scheme would contain reductions of capital and would be a scheme by virtue of which a person (New Holdco) would acquire all of the shares in the Company. Hence the reductions would be prohibited unless the exemption in section 641(2B) could apply. However, there are two problems with the availability of the exemption.
51. The first problem is that the composite scheme would not only provide for the Company to have a new parent undertaking. The second, and more difficult, problem is that because of the introduction of the nominees in place of some of the existing members of the Company, it clearly cannot be said that all or substantially all of the members of the Company before the composite scheme took effect would become members of New Holdco after the scheme. In the absence of any special or deeming provision in section 641(2A), the word "member" must be taken to mean the person on the register of members of the company to the exclusion of any other person, even a person on whose behalf the share is held: see Enviroco Limited v Farstad Supply A/S [2011] 1 WLR 921 at [35] – [40].
52. Mr. Moore QC attempted to address these difficulties in two ways. His first argument was that section 641(2A) should be interpreted so that it only applied to prohibit reductions of capital which directly enabled the acquisition of new shares in the company by a third party. He submitted that reductions forming part of a scheme, but which were independent of that part of the scheme under which shares in the company were acquired should not be prohibited.
53. Mr. Moore QC sought to illustrate the point by postulating a situation in which a bidder might want to acquire a target company which carried on several businesses, but did not wish to continue with one of those businesses. That could be achieved by a scheme under which there could be (i) a reduction of capital to create distributable reserves to support the demerger of the unwanted business by way of transfer of that business to a new company which would issue shares to the existing shareholders, and (ii) the transfer of the shares in the target company to the bidder for payment of cash. A literal interpretation of section 641(2A) would appear to catch the reduction in that situation, because it would form part of a scheme by virtue of which the bidder would acquire all of the shares in the target company.
54. However, Mr. Moore QC submitted that it was plain that such a scheme would not contain any element that infringed the mischief at which section 641(2A) was aimed, because the transfer of shares at stage (ii) would be potentially stampable, and so there was no exploitation of any tax loophole. The reduction in such a case would be included in the scheme to create distributable reserves to facilitate a group reorganisation, and the ability to carry out the transfer element of the scheme did not in any way depend upon that reduction.
55. Mr. Moore QC's second argument was that even if section 641(2A) might otherwise apply to a composite scheme, the exemption in section 641(2B) should be interpreted (i) so that it was available even if the scheme in question contained other matters than just the insertion of a parent undertaking above the scheme company, and (ii) so that the necessary identity of membership and proportionate equity shareholdings of the company and of the new parent undertaking required by sections 641(2B)(b) and (c) should be the result of a comparison of the register of members of the company immediately before and after the relevant cancellation and re-issue of shares, rather than before and after the entire scheme (or, as he put it, it ought to be possible for the necessary identity of membership and proportionate equity shareholdings for the purposes of the exemption to be created by the scheme itself).
56. Again, Mr. Moore QC illustrated his latter point with an example. He postulated a scheme proposed by a target company (T) under which (i) members will transfer their shares to a bidder (B) and then (ii) after B has been registered as the sole member of T, B's shares in T are cancelled and re-issued to a new holding company (H). In this example, the transfers of shares in T to B at stage (i) would be potentially stampable, so Mr. Moore QC submitted that the reduction in capital by the cancellation of shares at stage (ii) would be unobjectionable because there is no exploitation of the stamp duty loophole which Parliament intended to close. Accordingly, he contended, for the purposes of determining whether the conditions in sections 641(2B)(b) and (c) are satisfied, the relevant comparison should be between (i) T's register of members immediately prior to the cancellation and re-issue of shares and (ii) H's register of members immediately afterwards.
57. These were ingenious submissions, attractively made. But even accepting fully the lack of any mischief in what the Company is proposing in the instant case, or in the examples that Mr. Moore QC gave, I do have some real reservations as to whether his various solutions would legitimately be within the scope of a "purposive" interpretation of sections 641(2A) and (2B).
58. In Pollen Estate Trustee Company v IRC [2013] 1 WLR 3785, Lewison LJ summarised the modern approach to legislative interpretation,

"24. The modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. This approach applies as much to a taxing statute as any other: see IRC v. McGuckian [1997] 1 WLR 991 at 999; Barclays Mercantile Business Finance Limited v Mawson [2005] 1 AC 684, para 28. In seeking the purpose of a statutory provision, the interpreter is not confined to a literal interpretation of the words, but must have regard to the context and scheme of the relevant Act as a whole: see WT Ramsay Ltd v IRC [1982] AC 300, 323; Barclays Mercantile Business Finance Ltd v Mawson, para 29. The essence of this approach is to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, on its true construction, applies to the facts as found: see Barclays Mercantile Business Finance Ltd v Mawson, para 32.

25. In Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586, 592 Lord Nicholls of Birkenhead said:

"It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words … This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation.""

59. Although Lewison LJ endorsed a flexible approach to statutory construction, I think that it is clear that he still envisaged that the task upon which the court should embark is one of interpreting the language actually used in the statute. In that regard, in addition to respectfully endorsing the cautionary remarks made by Lord Nicholls in Inco Europe as to the certainty and precision which is required before the court adds words to a statute, I also do not think that it is open to the court simply to rely on the legislative purpose to arrive at a different scheme than the one that the legislature has decided upon. That point is made in Bennion on Statutory Interpretation (7^th ed.), at pages 343 -345, referring among other cases to Stock v Frank Jones (Tipton) Limited [1978] 1 WLR 231 in which Lord Simon said, at page 236C-G,

"Words and phrases of the English language have an extraordinary range of meaning. This has been a rich resource in English poetry (which makes fruitful use of the resonances, overtones and ambiguities), but it has a concomitant disadvantage in English law (which seeks unambiguous precision, with the aim that every citizen shall know, as exactly as possible, where he stands under the law). The first way, says Lord Blackburn, of eliminating legally irrelevant meanings is to look to the statutory objective. This is the well-known canon of construction referred to by my noble and learned friend on the Woolsack which goes by the name of "the rule in Heydon's Case (1584) 3 Co Rep 7a. (Nowadays we speak of the "purposive" or "functional" construction of a statute.)

But it is essential to bear in mind what the court is doing. It is not declaring "Parliament has said X: but it obviously meant Y; so we will take Y as the effect of the statute." Nor is it declaring "Parliament has said X, having situation A in mind: but if Parliament had had our own forensic situation, B, in mind, the legislative objective indicates that it would have said Y, so we will take Y as the effect of the statute as regards B." What the court is declaring is "Parliament has used words which are capable of meaning either X or Y: although X may be the primary, natural and ordinary meaning of the words, the purpose of the provision shows that the secondary sense, Y, should be given to the words … "

(my emphasis)

60. The application of these principles may not have the same outcome for all of Mr. Moore QC's arguments. So, for example, the first argument under which section 641(2A) should be interpreted so as not to prohibit reductions which are independent of that part of a scheme under which shares in the company are acquired, is closest to the legislative purpose identified in the BIS memorandum, and requires least remedial surgery to the statutory wording. But in contrast, the argument that section 641(2B)(b) should be interpreted to require a comparison of the membership of the company immediately before and after the proposed reduction of capital, rather than before and after the scheme, seems to me to require more radical amendment to the words that Parliament actually used in section 641(2B)(b). That sub-section expressly disapplies section 641(2A) in relation to "a scheme under which … all or substantially all of the members of the company become members of the parent undertaking." There is nothing in that provision that invites attention to the position of members at any intermediate stage of a scheme, still less directs attention to the position before or after the particular reduction of capital in issue. I cannot avoid the sense that this latter argument involves working backwards from the desired result in the instant case, and arriving at a very different regime than is suggested by the plain words used in the statute.
61. I am also concerned that if I were to accept Mr. Moore QC's arguments as to the purposive interpretation of sections 641(2A) and (2B) in order to arrive at an obviously desirable result in the instant case, this might suggest a change to the statutory scheme with unforeseen and unintended consequences for other, different, transactions that are not before me.
62. Given these concerns, I am grateful that I do not need to decide these points, because, as I have found, the mischief to which section 641(2A) is directed is not present in the instant case, and the Company is entitled to fulfil its commercial purposes by the use of separate Schemes so as to avoid any difficulty with the literal meaning of the legislation.

Class Issues and Voting at the Scheme Meetings

63. The classic statement of the approach of the court to the class question is that of Bowen LJ in Sovereign Life Assurance Co v. Dodd [1892] 2 QB 573. At pages 582–583, Bowen LJ said, referring to the question of whether section 2 of the Joint Stock Companies Arrangement Act 1870 (33 & 34 Vict c 104) (the forerunner of Part 26 of the CA 2006) bound dissentient creditors:

"What is the proper construction of that statute? It makes the majority of the creditors or of a class of creditors bind the minority; it exercises a most formidable compulsion upon dissentient, or would-be dissentient, creditors; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to that which it is unreasonable to require them to do, or of making a mere jest of the interests of the minority … The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it 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."

64. The English authorities were synthesised by Lord Millett NPJ sitting in the Court of Final Appeal in Hong Kong in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 at [27] into the following six principles:

"(1) It is the responsibility of the company putting forward the scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed.

(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4) The question is whether the rights which are to be released or varied under the scheme or the new rights which the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class.

(5) The court has no jurisdiction to sanction a scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with those principles. Even if it has jurisdiction to sanction a scheme, however, the court is not bound to do so.

(6) The court will decline to sanction a scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question."

65. If (contrary to the view that I have taken above) the Schemes were to be regarded as single composite scheme, answering the class question as posed in these cases would be comparatively straightforward. There would only be one group of current members of the Company whose rights against the Company would be affected by the composite scheme. All those members would, directly or through a nominee, each be entitled to receive the same proportion of Quilter shares and shares in New Holdco under the composite scheme. The fact that some members would end up holding shares in New Holdco through nominees rather than directly would not be a difference that would be likely to cause those members to have any different view of the merits or otherwise of the scheme as regards their economic interest. As such they could properly form part of the same class to discuss a composite scheme with a view to their common interest.
66. The complication introduced by the existence of two separate Schemes is that under the First Scheme some of the existing members of the Company have their shares transferred to nominees and there will also be a reclassification of shares into two different types of shares. It might be suggested that because there will be a number of groups holding different types of shares directly or through nominees at the end of the First Scheme, if that Scheme is viewed in isolation, a number of different classes should be constituted for voting purposes.
67. I do not, however, think that is correct. At the end of the First Scheme, the true position is that if the Second Scheme does not become effective, the unwind provisions will operate, so that all of the transfers and reclassification of shares will be reversed, and the members of the Company will all be returned to hold precisely the same shares in the Company as before the First Scheme. They will all also have received the same proportionate distribution of shares in Quilter. If, however, the Second Scheme is carried into effect, then the result will be that subject to the point regarding nominee holdings made above, all of the members prior to the First Scheme will, in addition to the Quilter shares, all receive the same proportionate allocation of shares in New Holdco. Given the equality of eventual outcome on either footing, there is thus no basis for separating the current members of the Company into different classes to vote on the First Scheme.
68. As regards the Second Scheme, there is also no reason why the current members of the Company should, in economic terms, regard themselves as in any different position so as to make it impossible for them to consult with a view to their common interest. Whether, after the operation of the First Scheme, the current member will hold an Ordinary Share or an "A" Ordinary Share, and whether or not the share will be held directly by him or indirectly via a nominee, in commercial terms the end result of the Second Scheme will be the same. The same proportionate number of shares in New Holdco will be allotted to each current member of the Company or to a nominee on his behalf. Again, in my judgment that means that it would be appropriate for a single class to be constituted for voting purposes.
69. The only wrinkle in this respect is that by the time that the Second Scheme is to take effect, a number of the members of the Company as at the Voting Record Date will necessarily have ceased to be members of the Company because their shares will have been transferred to nominees under the First Scheme. They will, however, have voted at the scheme meeting for the Second Scheme: and the nominees who have replaced them as the members of the Company prior to the time of the Second Scheme will not have had a vote at the scheme meeting at all.
70. Mr. Moore QC's answer to this is that the Second Scheme is no less a scheme between a company and its members under section 895 CA 2006, and the proposed court meeting is no less a meeting of members as required by section 896 CA 2006, even though when the Second Scheme takes effect a certain proportion of the members on the share register at the time of the meeting will have altered. He contended that the position in that respect is no different to the position in relation to most takeover schemes where there is usually the possibility of a change in the composition of the register of members in the periods between announcement of the scheme, the scheme meeting and the scheme becoming effective. I accept that submission, and note also that in many ways the complication introduced by the twin scheme approach should not really be an issue, because the relevant persons voting at the meeting in respect of the Second Scheme are the members on whose behalf the shares will be held by the nominees following the First Scheme.

Convening the Court Meetings

71. Accordingly, I will convene the separate scheme meetings for the two Schemes as requested by the Company. There are matters of detail to be considered in relation to the notification, advertisement and holding of those meetings that do not call for further comment in this judgment. I do, however, note that given the complexity of the explanatory circular for the Schemes, the Company has very sensibly also prepared a short brochure explaining and illustrating the process to assist its members.

The Demerger Reduction and Protection of Creditors

72. After the Managed Separation has taken effect, the Company will have no on-going business and no operating companies as its subsidiaries. In light of that fact, the Company also seeks (on a necessarily provisional basis) reassurance that there is no real likelihood that the Demerger Reduction will result in the Company being unable to discharge liabilities owed to creditors and it therefore will be appropriate for the Court to make an order dispensing with settlement of a list of creditors.
73. Under section 645(1) CA 2006, following the passing of a special resolution reducing a company's share capital, the company may apply for confirmation of the reduction. Under section 645(2), if the proposed reduction involves either a diminution of liability in respect of unpaid share capital or a repayment of paid-up share capital, section 646 CA 2006 applies and the Court is required to settle a list of creditors entitled to object to the reduction unless the Court directs otherwise. Under section 645(3), the Court may direct "having regard to any special circumstances of the case" that section 646 is not to apply. Under section 645(4), the Court may direct that section 646 is to apply "in any other case."
74. In the instant case, section 645(2) has no application, because the Demerger Reduction does not involve any diminution of liability in respect of unpaid share capital or the repayment of paid up share capital. The issue, therefore, is whether this court is likely to exercise its discretion under section 645(4) to direct that section 646 is to apply.
75. Section 646 CA 2006 defines the creditors who are entitled to object to a proposed reduction of capital and should be entered on the list of creditors:

"(1) Where this section applies (see section 645(2) and (4)), every creditor of the company who-

(a) at the date fixed by the court is entitled to any debt or claim that, if that date were the commencement of the winding up of the company would be admissible in proof against the company, and

(b) can show that there is a real likelihood that the reduction would result in the company being unable to discharge his debt or claim when it fell due

is entitled to object to the reduction of capital.

(2) The court shall settle a list of creditors entitled to object."

76. Further, section 648(2) CA 2006 provides that the Court must not confirm the reduction unless it is satisfied that, with respect to every creditor of the company who is entitled to object to the reduction of capital that either,

"(a) his consent to the reduction has been obtained or

(b) his debt or claim has been discharged, or has determined or has been secured."

77. The "real likelihood" test in section 646(1)(b) was introduced by the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009. In Re Liberty International plc [2010] EWHC 1060 at [15] – [20], Norris J gave the following guidance on the application of the test which has been followed in Royal Scottish Assurance Plc, Petitioner [2011] CSOH 2; 2011 SLT 264, Sportech Plc, Petitioner [2012] CSOH 58; 2012 SLT 895 and Re Vodafone Group plc [2014] EWHC 1357 (Ch),

"15. Claims which are admissible in proof include future claims (i.e. claims not presently due but which are certain to accrue due in the future) and contingent claims (i.e. where under an existing obligation Liberty may or will become subject to a present liability on the happening of some future event). But a present, future or contingent creditor cannot object to a reduction in the company's capital simply because he is such: he must demonstrate that "there is a real likelihood that the reduction would result in the company being unable to discharge his debt…when it fell due".

16. The test imposed by the statute is "a real likelihood", and it is undesirable to put any gloss upon those words. But equally it is unhelpful simply to say that I share the view of Mr Registrar Nicholls that, having regard to the terms of the intended demerger in the instant case, no creditor could satisfy that test and accordingly a list of creditors was properly dispensed with.

17. Where the section calls upon a creditor to show "a real likelihood" that the reduction "would" result in an inability to discharge the debt when it becomes due, it is calling upon the creditor to demonstrate a particular present assessment about a future state of affairs. In considering the evidence I identified three elements: what follows is descriptive of the course I followed, not prescriptive as a course to be adopted by others.

18. First, I looked at the factual: whatever assessment is made has to be well grounded in the facts as they are now known. Although one is looking to the future one has to avoid the purely speculative.

19. Second, there is a temporal element. One is looking forward for a period in relation to which it is sensible to make predictions. That period will, of course, be affected by the nature and duration of the liability in question. So a continuing direct liability under a lease may indicate that a correspondingly long term view must be taken. But in general the more remote in time the contemplated event that will make payment fall due the more difficult it must be to establish the reality of the likelihood that the return of capital will itself result in inability to discharge the debt. For private companies directors are required to look forward for twelve months. I do not suggest that implicitly the same period applies where the sanction of the court is necessary: but I do consider that in any given case there will be a natural temporal boundary beyond which sensible assessment of likelihood is not possible.

20. Third, the section obviously does not require a creditor to prove that a future event will happen: it is concerned to evaluate the chance of the event (the company's inability to discharge the debt because it has returned capital). It describes the chance as "real likelihood", thereby requiring the objecting creditor to go some way up the probability scale, beyond the merely possible, but short of the probable. That is the "degree of persuasion" (as it was put by Hoffmann J in re Harris Simons Construction Limited [1989] BCLC 202 at 204 F to H) for which I have looked in assessing the evidence."

The Company's Creditors

78. According to the evidence, as at the date the Demerger Reduction will become effective (the "Demerger Effective Date"), the expected creditors and contingent creditors of the Company which would be admissible in proof against the Company if that date were the commencement of the winding up would amount to about £523 million.
79. The bulk of that sum comprises liabilities in respect of bonds issued by the Company. The Company has issued £450 million 7.875% Subordinated Notes due 3 November 2025 and £500 million 8% Subordinated Notes due 3 June 2021, of which £60.8 million of the former and £340.9 million of the latter remain outstanding. In addition, the remaining coupons in respect of these bonds would amount to £35.9 million and £81.8 million, respectively, as at the Demerger Effective Date.
80. The Company also has a revolving credit facility with Bank of America Merrill Lynch International Ltd. Although the Company has not drawn down funds under this facility, and does not expect to do so prior to the Demerger Effective Date, the Company is obliged to pay a commitment fee of 0.245% per annum of the funds made available to it. The Company expects the commitment fee to be £182,575 on the assumption that the facility remains undrawn.
81. Prior to the publication of the Scheme circular, the Company intends to enter into certain agreements in connection with the implementation of the separation of the Group's businesses. These agreements will include a tax matters agreement with Quilter governing the allocation of tax and conduct of the tax affairs of the Group and the Quilter Group, an underwriting agreement with, amongst others, Merrill Lynch International, JP Morgan Securities plc and Goldman Sachs International pursuant to which the Company will provide certain warranties in connection with the Quilter Share Sale, a sponsor's agreement with Merrill Lynch International pursuant to which the Company will provide certain warranties and indemnities customary in the context of a class 1 transaction and a separation agreement with Quilter setting out the process by which the Quilter demerger will take place. However, the Company's directors have no reason to believe that the Company will have any liability under the tax matters agreement, underwriting agreement, sponsor's agreement or separation agreement.
82. In 2001 the Company entered into an indemnification agreement with a company now known as St Paul Travelers Companies Inc ("Travelers") in respect of historic guarantee liabilities. Travelers raised concerns in relation to the effect of the separation of the Group's businesses and the Demerger Reduction on its rights under that indemnification agreement and commenced legal proceedings in the United States District Court for the Southern District of New York (the "US Court") on 12 March 2018.
83. Notwithstanding the Company's position that a release agreement that it entered into with Fidelity & Guaranty Life Insurance Company (a company it acquired in 2001 and subsequently sold in 2011) and its parent company on 14 November 2017 is effective and that there is no continuing exposure to Travelers, in order to address Travelers' concerns and to reduce the risk of delay to the Managed Separation, New Holdco entered into a parent company guarantee of the Company's obligations under the Travelers indemnification agreement. This was provided before the US Court hearing on 28 March 2018. Travelers subsequently consented to the Demerger Reduction and the proceedings in the US Court have been voluntarily dismissed.
84. There are various other sources of potential liabilities such as other warranties and indemnities provided by the Company, employee liabilities, liabilities in relation to two legacy pension schemes (now wound up), litigation, intra-group liabilities and tax. However, the evidence is that the known or anticipated amounts involved are nil or comparatively small, and/or have been insured against.

The "Locked Box" proposal

85. To resist any suggestion that there is any real likelihood that the Demerger Reduction would result in the Company being unable to discharge its liabilities as at the Demerger Effective Date as they fall due, the Company has proposed that it will undertake to the court at the eventual hearing to sanction the First Scheme and confirm the Demerger Reduction that it will retain a portfolio of assets (the "Locked Box") which (together with income therefrom) will be used to meet such creditors' claims as they fall due.
86. This proposal was trailed in the Review of Financial Performance in the Company's Annual Report and Accounts for 2017 which were published in March 2018 in the following terms,

"As part of the managed Separation it is proposed that certain remining operating subsidiaries of [the Company] are transferred to a new South African holding company of the group [New Holdco]. The steps implementing this transfer are anticipated to include a court approved reduction in capital of [the Company] which will augment distributable reserves for [the Company]. After these steps [the Company] will have no on-going businesses and none of the operating companies in the current Old Mutual group will be direct or indirect subsidiaries. [The Company] will need to satisfy the court that it will continue to hold sufficient high quality liquid assets to meet its liabilities and deal with any contingencies, plus adequate headroom, taking into account relevant insurances. The assets within [the Company] are expected to largely consist of sterling denominated high quality fixed income securities and cash or near cash instruments to match the maturity profile of the debt obligations. The speed of release of any surplus from [the Company] is anticipated to be at the discretion of the UK court in the context of the reduction of capital."

Analysis

87. At this necessarily preliminary stage, the issue is whether I consider that a creditor falling within section 646(1) CA 2006 would have any realistic prospect of being able to persuade the court that notwithstanding the Locked Box undertaking offered, there was a real likelihood that the Demerger Reduction would result in the Company being unable to discharge his debt or claim when it fell due.
88. The factors relevant to that evaluation must first include the nature and amount of the relevant liabilities and the confidence that the court can have that they have been correctly identified and valued. The next factor must be the adequacy of the security provided by the Locked Box arrangements. This will be affected, in particular, by the nature and quality of the assets to be retained, the amount of surplus asset coverage to guard against volatility in the value of any assets and any unforeseen liabilities being discovered, the liquidity of those assets so as to enable the Company to be able to access cash as and when the liabilities are expected to fall due, and the terms of the undertaking offered to preserve the arrangements.
89. As regards the Company's relevant liabilities, as indicated above, the bulk of the amounts involved are bonds with known maturities. The remainder of the Company's actual and contingent liabilities appear to have been investigated and the proposals prepared on a careful and cautious basis, with insurance cover arranged where appropriate. Accordingly, the likelihood of unforeseen liabilities arising would seem to be small, and the cashflow required to meet the liabilities can be (and has been) projected and provided for.
90. The assets potentially proposed to be included in the Locked Box are: (i) £23 million in cash; (ii) £489 million in gilts issued by the UK Government (which can be converted into cash as and when required); (iii) the remaining 9.6% of shares in Quilter if the Quilter Share Sale does not proceed (valued at £115 million which is 50% of the lowest of a range of values determined by a third party); and (iv) shares in OM Group (UK) Limited (valued at £62 million which is 75% of their expected value as at the Demerger Effective Date). If the Quilter Share Sale proceeds for an amount equal to or in excess of £115 million, then the amount to be retained in the Locked Box shall be £115 million in cash instead of the Quilter Shares.
91. The undertaking offered permits the Company to replace any cash or assets in the Locked Box with cash or assets which are narrower range investments as defined by section 1(4) of the Trustee Investments Act 1961, and which are of such liquidity as will enable the Company to meet any payments in respect of the liabilities as at the Demerger Effective Date as and when they fall due (such cash or assets being defined as "Permitted Assets").
92. The total current value of the assets potentially available to be placed into the Locked Box at the outset is therefore said to be £689 million. On the basis of these figures, the initial margin of excess assets in the Locked Box, assuming that the Quilter shares are included, is about £689 million - £523 million = £166 million. The initial excess cover is therefore about 30%. The evidence is that the Company also expects to receive interest payments of approximately £30 million from the gilts over the relevant period.
93. Whilst it seems to me that 30% excess asset coverage would be more than sufficient margin for safety given the nature of the assets and liabilities to be covered, the undertaking originally proposed to be offered would have permitted the Company to conduct quarterly revaluations of the liabilities as at the Demerger Effective Date to which it remains subject, and to reduce the amount in the Locked Box so that there remained only a 10% excess coverage (the "Minimum Asset Coverage"). The Company would be free to deal with the other assets removed from the Locked Box as it saw fit. As originally drafted, this would have permitted the Company almost immediately to remove from the Locked Box all of the cash and a portion of the gilts, leaving assets which were more uncertain in value or illiquid.
94. This opportunity for reduction of the safety margin and removal of assets gave me some concern. Whether a 10% Minimum Asset Coverage will be sufficient must depend upon the nature of the assets left in the Locked Box, and the time at which it is anticipated that the relevant liabilities will fall due. If the more stable and liquid assets were to be removed, and the more volatile and illiquid assets were to be left in the Locked Box, there would be an increased risk of a shortfall. Hence the court might require a greater safety margin.
95. I raised this point with Mr. Moore QC at the hearing. Readily accepting this point, the Company amended its proposed undertaking to the effect that the Locked Box undertaking would continue to apply to assets (i) having an aggregate value equal to the Minimum Asset Coverage, and (ii) being Permitted Assets. In essence the Company's revised proposal means that no assets shall be entitled to be removed from the Locked Box (other than to pay the Company's relevant liabilities) unless there remains cash or near cash assets to pay the relevant liabilities when they are anticipated to fall due, with a 10% margin. The revised form of the undertaking is attached as an Annex to this Judgment.
96. Mr. Moore QC told me that he was not aware of any precedent or standard court practice that set a specific safety margin in this type of situation. For my part, given the safeguards both as to the quality and liquidity of the remaining assets and the terms of the revised undertaking to which I have referred, on the facts of this case I think that the court should be satisfied that a 10% margin would be appropriate, and that on such basis it should not direct a list of creditors to be settled pursuant to section 646 CA 2006.

Conclusion

97. I shall therefore make orders convening the meetings for the two Schemes. Those orders shall contain a recital reflecting the (necessarily provisional) views that I have expressed as regards section 641(2A) CA 2006 and the absence of any need for the settlement of a list of creditors pursuant to section 646 CA 2006.
- - - - - - - - - - - - Annex The Undertaking

THAT:

(1) subject as set out in paragraphs (2) to (4) below, for so long as there shall remain outstanding any debt of, or claim against, the Company which, if the effective date (the "Effective Date") of the proposed reduction of share capital and cancellation of share premium account of the Company (the "Reduction of Capital") were the commencement of the winding up of the Company, would be admissible in proof in such winding up, the Company shall retain the assets set out in the schedule of the assets which the Company holds or intends to hold from the Effective Date (the "Schedule of Admissible Assets") (as updated prior to the application for the confirmation of the Reduction of Capital (the "Final Assets")) and shall use the Final Assets and any income from such assets solely for the purpose of discharging such liabilities of the Company to the creditors and contingent creditors of the Company as at the Effective Date (the "Final Liabilities");

(2) if the Company proposes to sell the 9.6 per cent. holding in the share capital of Quilter plc which it does not intend to demerge to its shareholders (the "Quilter IPO Shares") for an amount equal to or in excess of £115 million (being the amount set out in the Schedule of Admissible Assets) then the Company shall be free to effect such sale and this Undertaking shall then apply to a cash amount of £115 million instead of the Quilter IPO Shares, and the Company shall be free to deal as it sees fit with any proceeds from the sale of the Quilter IPO Shares which exceed such amount;

(3) the Company shall be free to replace any of the Final Assets or the cash referred to in paragraph (2) above with either cash or assets which are narrower range investments as defined by Section 1(4) of the Trustee Investments Act 1961 and which are of a liquidity so as to ensure that the Company is able to meet any payments in respect of the Final Liabilities as and when they fall due (such cash or assets being "Permitted Assets"); and

(4) the Company may recalculate the aggregate amount of the Final Liabilities on a quarterly basis, on or around the first business day of each of January, April, July and October in each year during which the Undertaking remains outstanding, with the first such recalculation on or around 1 October 2018. In effecting any such recalculation, the Company shall value the liabilities on the same basis or an equivalent basis to that set out in the witness statement of Ingrid Gail Johnson dated 9 April 2018 and shall add to the amount so determined an excess equal to 10 per cent. of such amount, the resulting aggregate amount being the "Minimum Asset Coverage". The Undertaking shall continue to apply to such portion of Final Assets (as selected by the Company) which (i) have an aggregate value at least equal to the Minimum Asset Coverage; and (ii) are Permitted Assets, and the Company shall be free to deal with any other assets as it sees fit.