Re Co-operative Bank Plc

The court considered an application to permit the Co-operative Bank to put forward a materially modified scheme of arrangement under section 896 of the Companies Act 2006, addressing a commercially significant "glitch" in the original scheme that distorted pro rata allocation of equity under an open offer. The judge examined whether legal or equitable impediments (including tortious duties, contractual bars, fiduciary duties, estoppel or statutory constraints under FSMA) prevented the Bank or supporting creditors from changing the terms. The court found no tortious duty of care, no contractual bar (express or implied) preventing withdrawal or modification, no equitable principle (including fiduciary duty or estoppel) that precluded the change, and no statutory bar in the circumstances. Given the urgency of recapitalisation and that the modified scheme more closely reflected the original commercial aim of pro rata allocation, the court permitted the modified scheme to proceed subject to proper explanation, notification and the regulator being invited to raise any regulatory objection.

Background and parties: The Bank proposed a scheme of arrangement under section 896 Companies Act 2006 to restructure seven series of subordinated dated notes (aggregate c.£937m) as part of a Liability Management Exercise intended to raise capital and avoid Resolution under the Banking Act 2009. The proposed scheme included a conversion into new ordinary shares and an open offer of additional new ordinary shares with a minimum allocation. A group of large noteholders (the LT2 Group and supporting creditors, and Invesco) sought a modification to address a "glitch" that advantaged holders of very small parcels of notes and undermined pro rata allocation.

Nature of the application: The Bank applied for directions and approval to present the modified scheme to the single meeting of scheme creditors and ultimately for sanction by the court.

Issues framed: (i) whether there were legal impediments (tort, contract, statute) to the Bank withdrawing or modifying the original scheme; (ii) whether equitable doctrines (fiduciary duty, estoppel) precluded modification; (iii) whether, in the court's discretion, the modified scheme should be permitted to proceed given the timetable and fairness to noteholders; and (iv) whether any regulatory issues (notably alleged insider dealing or breaches of FSMA section 178) prevented the modification.

Court's reasoning and decision: The judge reviewed tort law (duty of care), concluded there was no basis to impose a duty that would bar modification. Contractually the bank was not barred: lock-up documents expressly contemplated termination where the company gave notice of intention not to proceed or to proceed on materially different terms, so no implied contractual promise precluded modification. No statutory impediment was identified. In equity, neither fiduciary duties to creditors nor estoppel principles (estoppel by convention or promissory estoppel) were made out: there was no clear unambiguous promise or equitable basis to stop the Bank changing course. The judge exercised his judicial discretion to permit the modified scheme to proceed because it better reflected the intended pro rata outcome, increased locked‑up support, and urgency made reconsideration necessary; he required adequate explanation to creditors and left open any regulatory challenge (the regulator was aware and could apply if necessary).

Procedural posture: first instance application in the Companies Court; the court gave directions permitting the modified scheme to be presented for creditor approval and the subsequent sanction hearing.

The court allowed the Bank to present and seek approval of the modified scheme. Hildyard J held there was no legal or equitable impediment (no tortious duty, no contractual bar, no fiduciary duty preventing modification, and no estoppel) to the Bank or supporting creditors withdrawing or modifying the originally proposed scheme. Given the urgency, the modified scheme better reflected the intended pro rata allocation, had greater locked-up support and could fairly be explained to creditors, so the court permitted it to go forward subject to proper notification and the regulator being given liberty to raise any regulatory objections.