Link Fund Solutions Limited, Re

The court considered an application by Link Fund Solutions Limited (LFSL) to sanction a scheme of arrangement under Part 26 of the Companies Act 2006 to settle claims arising from the suspension of the LF Equity Income Fund. Key legal principles applied included the statutory requirements in s895 et seq., the established three-part/related tests for sanction (compliance with statute; fair representation and bona fides of the voting majority; and whether an intelligent and honest member might reasonably approve), and the court’s supervisory discretion to refuse sanction where a scheme is unfair or there is a material defect in procedure or disclosure.

The court held that the scheme lawfully effected releases of claims against LFSL and related parties (other than for fraud or dishonesty), and that loss of access to the Financial Services Compensation Scheme and the Financial Ombudsman Service resulted from the compromise of claims and was not an impermissible deprivation of statutory protections. The Explanatory Statement met statutory requirements (s897) and the Practice Statement guidance; the Investors’ Committee and engagement processes were adequate; turnout and voting complied with the Convening Order; novel features (including the Contribution Reduction Mechanism and Affiliate/Adviser releases) were not fatal "blots"; and the settlement amount and alternatives were sufficiently explained. On that basis the court sanctioned the Scheme.

The applicant, Link Fund Solutions Limited (LFSL), a regulated authorised corporate director, proposed a Part 26 scheme to settle claims arising from the suspension (3 June 2019) and subsequent winding up of the LF Equity Income Fund. The Financial Conduct Authority (FCA) had investigated and proposed a restitution figure (the FCA Total Amount) and conditioned a settlement on court sanction of the scheme; LFSL and LAHL agreed to create a Settlement Fund (up to £230m, with a reserve) to compensate Suspension Date Investors in return for releases of claims.

Nature of the application: an application under Part 26 Companies Act 2006 for court sanction of a scheme of arrangement implementing the Settlement between LFSL and its creditors (Scheme Creditors) and giving releases of claims against LFSL, affiliates and advisers, together with mechanisms to address third party claims.

Procedural posture: first instance sanction hearing following the Convening Judgment; the Court Meeting had approved the scheme by the statutory majority (about 93.72% by number and c.96% by value of those present and voting). Numerous Grounds of Opposition were filed by investors and representative groups including Harcus Parker and Transparency Task Force.

Issues framed by the court:

• Whether statutory procedures and convening directions were complied with.
• Whether the class was fairly represented and the majority acted bona fide.
• Whether the Explanatory Statement fairly explained the compromise required by the Scheme (s897 and Practice Statement).
• Whether the Scheme was one which an intelligent and honest member of the class might reasonably approve.
• Whether there were other material defects or "blots" (including loss of FSCS/FOS rights, Affiliate/Adviser releases, Contribution Reduction Mechanism).

Court’s reasoning and findings:

• Statutory jurisdiction and procedure: the court had jurisdiction under s895 and related provisions; LFSL complied with the Convening Order and made extensive and active efforts to notify Scheme Creditors, including liaising with intermediaries, use of website, press and social media and tailored voter assistance.
• FSCS and FOS: loss of access to FSCS or ability to pursue complaints to FOS was the consequence of Scheme Creditors compromising claims against LFSL; that consequence does not render the Scheme beyond the court’s power to sanction. The FCA Compensation Rules require rejection of FSCS applications where underlying claims have been compromised; FOS adjudication presupposes a complaint against the firm. There was no impermissible ouster of statutory protections.
• Explanatory Statement: it was not materially misleading. Arithmetic statements (e.g. the Settlement Fund as c.77% of the FCA Total Amount) were defined and accompanied by a table showing pence per share outcomes under minimum and maximum scenarios. The document sufficiently explained the alternative outcomes if the Scheme failed and the attendant uncertainties.
• Representation and voting: the class constituted a single class and was fairly represented; turnout (21.6% by number, 47% by value) was not objectionable and the statutory majorities were bona fide.
• Releases and other provisions: Affiliate and Adviser releases and the scheme’s mechanisms to address ricochet/contribution claims were acceptable as part of the overall compromise; novel features (Contribution Reduction Mechanism) were covenants rather than impermissible releases, and not a "blot".
• Overall fairness: an intelligent and honest Scheme Creditor could reasonably approve the Scheme given the offered distribution, the uncertainties of litigation and regulatory outcomes, and the evidence on the negotiating position and limitations on additional contributions from LAHL.

Result: the court sanctioned the Scheme and reserved sealing of the sanction order to 29 February 2024, permitting written applications for permission to appeal by 23 February 2024.

The court sanctioned the proposed scheme of arrangement under Part 26 of the Companies Act 2006. The court found statutory requirements complied with, the single class of creditors was fairly represented and acted bona fide, the Explanatory Statement adequately explained the compromise (including consequences for FSCS and FOS), and novel features and releases were not fatal defects; accordingly the scheme was fair and a reasonable scheme that an intelligent and honest member might approve.