Fidelity Investments International Plc v Mytravel Group Plc

In a scheme of arrangement, the court must identify at the meeting stage the classes whose rights are sufficiently aligned for a single arrangement. Creditors whose rights are materially different, whether because of subordination or because of the proposed arrangements, need not be included in the same class. A court should not decide a wider economic-interest question when it is unnecessary to determine the constitution of the meetings. An unnecessary finding cannot create an issue estoppel, particularly where the parties before the court were not representative of all affected persons. The Court of Appeal therefore set aside a recital recording such a finding, without deciding its factual correctness, and refused permission to appeal the distinct section 427 issue.

MyTravel Group plc sought to restructure its balance sheet through a scheme under the Companies Act 1985. Its original proposals relied on section 427 to transfer the undertaking and liabilities to a new holding company. Mr Justice Mann held that the proposals did not constitute a reconstruction for that purpose and refused to order meetings. The company amended the scheme to remove the proposed statutory transfer and obtained permission to convene separate meetings of general creditors and shareholders.

Despite treating the section 427 issue as decisive, the judge also found that the subordinated bondholders had no economic interest and recorded that conclusion in the orders. Fidelity Investments International Plc and other members of the bondholders’ ad hoc committee appealed against that finding and related interlocutory decisions. The central questions were whether the finding was necessary, whether the bondholders belonged in the same class as general creditors, and whether it could create an issue estoppel.

The Court of Appeal, in a judgment delivered by Lord Justice Chadwick and agreed by Lord Justice Jacob and Mr Justice Lloyd, allowed the appeal to the limited extent of setting aside the fourth recital to the second order of 24 November 2004. That recital recorded the finding that the subordinated bondholders had no economic interest in the company. The court expressed no view on the correctness of that factual finding.

1. Scheme procedure. The court endorsed the three-stage analysis described in In re BTR plc [2000] 1 BCLC 740 and adopted in In re Hawk Insurance Co Ltd [2001] EWCA Civ 241: first, the convening of meetings; second, approval by the statutory majority; and third, the court’s consideration of whether to sanction the arrangement. At the first stage, the court must address matters going to jurisdiction, including the proper constitution of creditor classes. The merits and fairness of the scheme ordinarily belong to the sanction stage.
2. Class composition. The amended scheme did not propose any compromise or arrangement with the subordinated bondholders. In any event, their rights were materially different from those of the general creditors because of the subordination provisions applicable on an insolvent liquidation, and their rights under the proposed arrangements were also different. Applying the class-composition approach identified in Hawk Insurance and adopted in Sea Assets Limited v Perusahaan Pereroan (Persero) Pt Perusahaan Peneerbangan Garuda Indonesia [2001] EWCA Civ 1696, the bondholders and general creditors were not members of the same class.
3. Economic-interest finding. It was unnecessary to determine whether the bondholders had an economic interest in the company. That wider question was not material to the constitution of the meetings under the amended scheme. The finding was therefore obiter dicta and could not create an issue estoppel. The bondholders before the judge were not representative of other bondholders, so the findings could not affect persons who had not been parties.
4. Other appeal grounds. The court refused permission to appeal from the first order, including the interlocutory decisions relating to the economic-interest finding. The company had not appealed the judge’s section 427 conclusion, and the Court of Appeal therefore expressed no view on whether the original proposals constituted a reconstruction for that purpose.

1. High Court of Justice, Chancery Division: Mr Justice Mann held that the original scheme could not attract an order under section 427 of the Companies Act 1985 and refused to order meetings. After amendment removing the proposed statutory transfer, he permitted separate meetings of general creditors and shareholders and recorded a finding that the subordinated bondholders had no economic interest.
2. Court of Appeal (Civil Division): On [2004] EWCA Civ 1734, the court set aside the recital recording the unnecessary economic-interest finding and refused permission to appeal the first order.