Welcome Financial Services Ltd, Re Companies Act 2006

The court construed a Part 26 scheme of arrangement under the Companies Act 2006 and ruled which classes of customer claims were compromised by the Scheme and which were not. The judge held that the Scheme can bind persons claiming in their capacity as creditors but cannot, by virtue of Part 26 as explained in Lehman Brothers, compromise claims asserting rights in a customer’s capacity other than as creditor. The court applied the test in Nortel for whether post-Record Date liabilities arise from obligations incurred before the Record Date and concluded that most pecuniary claims (including overpayments, uncashed cheques and charges claims tied to pre-Record Date agreements) are Scheme Liabilities unless they fall within the Scheme’s express Excluded Liabilities (notably PPI Liabilities).

The court further held that many CCA 1974 remedies (for example non‑pecuniary relief under ss.140A–D, s.142 declarations where the applicant remains a debtor, and certain common law and time order remedies) are not compromised by the Scheme when pursued by a customer in his capacity as debtor. The PPI exclusion in Schedule 3 was held to operate to exclude claims arising from mis‑sold payment protection insurance as defined in the Scheme. Finally, the court construed interaction between the Moratorium, the Bar Date and judgments obtained under carve‑out proceedings, allowing successful claimants who obtained judgments within the carve‑out to set off the judgment against debts and to treat any residual sum as an Ascertained Scheme Claim for distribution purposes.

This was an application by Welcome Financial Services Limited and the Scheme Supervisors for declarations as to the construction and effect of a Scheme of Arrangement sanctioned under Part 26 Companies Act 2006. The Scheme followed group restructuring in the Cattles group and established a Moratorium on proceedings by Scheme Creditors, a Bar Date (2 June 2011) for submitting claims and a detailed procedure for submission, adjudication and distribution.

Background and parties

• Welcome made loans to consumers (Welcome Finance and Shopacheck). After the Scheme took effect many customers asserted claims arising from their credit agreements.
• Applicants sought declarations that the Scheme compromised those claims; the represented customers argued many claims fell outside the Scheme or were Excluded Liabilities.

Nature of relief sought

The Applicants sought declaratory relief about the proper construction of the Scheme: whether particular categories of claims (CCA claims, Non‑PPI insurance claims, overpayment claims, uncashed cheque claims and charges claims) were caught by the Scheme, whether they were Scheme Liabilities as defined, and whether they were Excluded Liabilities (notably PPI Liabilities).

Issues framed

1. Whether the claimants were asserting claims in their capacity as creditors (so as to fall within Part 26) or in some other capacity.
2. Whether a liability arising after the Record Date nonetheless fell within the Scheme because it arose from an obligation incurred on or before the Record Date (applying the test in Nortel and related authorities).
3. Whether the claims were Excluded Liabilities under Schedule 3 (in particular PPI Liabilities).
4. How the Scheme treated judgments obtained under proceedings permitted by the carve‑outs to the Moratorium.

Court’s reasoning

The court applied the established principles of commercial construction (Re Marconi) and key authorities on the scope of Part 26 (Lehman Brothers and its Court of Appeal affirmation) to hold that Part 26 schemes can compromise rights only insofar as those rights are asserted in the claimant’s capacity as creditor. The court applied Nortel (and Unite) to conclude that liabilities arising after the Record Date can nevertheless be Scheme Liabilities if they flow from obligations incurred before that date; the statutory CCA remedies were viewed as statutory rules superimposed on credit agreements that exposed the creditor to contingent pecuniary liabilities as at the Record Date. Against that background the court held:

• Non‑pecuniary CCA remedies pursued by a customer in his capacity as debtor (for example certain declarations and time orders) are not compromised by the Scheme.
• Pecuniary CCA remedies, overpayment claims, uncashed cheque claims (limited to cheques issued on or before the Record Date), Non‑PPI insurance claims tied to pre‑Record Date contracts, and charges claims related to pre‑Record Date agreements are Scheme Liabilities because they arise from obligations incurred before the Record Date.
• PPI‑related claims fell within the Scheme’s express exclusion for PPI Liabilities and so were not compromised by the Scheme.
• Where a claimant successfully obtains judgment in proceedings permitted by the carve‑outs to the Moratorium, the judgment may be set off against any debt owing to the company and any net balance treated as an Ascertained Scheme Claim for distribution.

The judge emphasised the need to construe the Scheme consistently with Part 26’s statutory limits and commercial common sense, and noted that scheme procedures (Bar Date and Scheme Supervisors’ role) limit how certain disputes can be recognised for distribution purposes.

The court made declarations construing the Scheme. It held that Part 26 permits compromise only of claims asserted in the capacity of creditor; many non‑pecuniary CCA remedies pursued by customers as debtors are not bound by the Scheme. By contrast, most pecuniary claims tied to agreements concluded before the Record Date (overpayments, uncashed cheques described, Non‑PPI insurance claims pre‑14 January 2005, charges claims and pecuniary CCA claims pursued in the capacity as creditor) are Scheme Liabilities because they arise from obligations incurred before the Record Date (applying Nortel and Unite). PPI‑related claims fall within the Scheme’s express exclusion for PPI Liabilities. The court also ruled that judgments obtained under carve‑out proceedings may be set off and any balance treated as an Ascertained Scheme Claim. The declarations were granted to give effect to that construction.