5 November 2018

Background

The respondent, CD, made allegations that he had been anally raped in 1990, when he was 12 year old, by a staff member, BJ, at a school that he had been attended. The appellants had employed BJ as a teacher at the school. CD began his action in January 2006 but did not explicitly say that he had been raped until February 2014, some 24 years after the alleged rape and 8 years after the start of his litigation. Under s 11 of the Limitation Act 1980 (LA 1980) the respondent ought to have brought his action by July 1993, it being common ground that the date of knowledge in respect of the alleged rape was no later than the date on which the cause of action accrued, namely, July 1990. However, in July 1993, the respondent was still a minor and, therefore, by virtue of ss 28(1) and 38(2) of the Act, the limitation period expired three years after the date on which he reached his majority, being January 1999. At trial, the respondent applied to disapply the limitation period under LA 1980 s 11. In opposition to the application the appellants cited the difficulties they had had in tracing a number of potential witnesses. The judge exercised his discretion under LA 1980 s 133 to disapply the limitation period. The appellants appealed. 

Appeal dismissed.

Issues and decisions

(1) Whether the judge exercised his discretion correctly to disapply the limitation period. 

A failure to notify a defendant of the real nature of the claim after issue of a claim form in very general terms was one of ‘all the circumstances of the case’ in LA 1980 s 33(3), although it should not carry as much weight as delay before the issue of the claim form. In addition, the disappearance of evidence and the loss of cogency of evidence even before the limitation clock began to tick was also relevant. Where a claimant asked the court to exercise a discretion in his favour which disapplied a limitation period passed for the benefit of defendants, it was incumbent upon him to out all his cards on the table at the earliest opportunity 

In the present case, the appellants could have had no idea that the respondent had intended to make an allegation of rape until 2014, some 24 years after the alleged rape and eight years after the action had begun. In addition, there had been no conviction of BJ of any offence involving the respondent and the complaint made by him was not only an uncorroborated complaint coming out of the blue but had been made in the face of previous inconsistent statements and at variance with contemporaneous documents. Although a decision to disapply the limitation period was a discretionary one, the judge had made a number of errors of law, such as entitled the court to intervene. 

In assessing the cogency of the respondent’s evidence about the alleged rape, the judge had failed to make any reference to the fact that respondent had positively asserted in 2003 (10 years after the expiry of the limitation period allowed by s 11 and seven years after he had attained his majority) that he had no complaint about his time at the school; that in 2007 he had said no more than that another boy might have been sexually abused; that even in his witness statement of 2014 the evidence about the alleged rape was no more than a single sentence; and that he had told Professor the expert in 2015 that ‘It’s all a blank really.’ 

The judge’s findings that some inconsistencies in the respondent’s evidence with the contemporaneous evidence were due to the passage of time and that the respondent had exaggerated allegations of non-sexual abuse were also not readily reconcilable with his preliminary assessment that the cogency of the evidence of the alleged rape had been unlikely to be affected by the passage of time. The judge had also recorded, in relation to the record that the respondent had been upset about criminal charges being brought against adults about whom he cared, that the respondent had been unable to explain that or recall how he had felt at the time. With regard to the appellants’ evidence, it was surprising that the judge had brushed aside any difficulty with BJ recalling events said to have taken place over 20 yeas earlier given that BJ’s evidence had been that he had no specific memory of the respondent as a pupil. In addition, the judge had seriously underestimated the prejudice to the appellants in not being able to call key witnesses. With regard to delay in mentioning the rape allegation, although the judge had accepted the respondent evidence that he had been too ashamed and embarrassed to speak about it (even to his own solicitors or the experts who had interviewed him), he had made no finding as to whether that had been reasonable, let alone prompt. The judge had accepted that the respondent had known enough about his cause of action on attaining majority but had been disabled from pursuing his claim owing to the psychological effects of the abuse and noted that the respondent had first taken legal advice in 2005. In doing so the judge had mixed up the respondent’s taking of legal advice in 2005 about the alleged physical abuse and his failure to mention the alleged sexual abuse until 2014. Lastly, the judge had failed to consider the prejudicial effect on the appellants’ ability to defend the claim of overall delay between the date when the alleged rape had taken place and the date when the rape had first been notified to the appellants. Although the judge had concluded that a fair trial could take place, that was not itself determinative (see [37], [40], [45], [50]-[60], [65]-[71] of the judgment).

Re-exercising the discretion, the factors that weighed most heavily were the following; (i) although the cause of action had accrued in July 1990, CD had not revealed the nature of the allegation that he had wished to make until February 2014, and even then in the tersest terms. The overall effective delay was therefore nearly 24 years, meaning that the complaint as it eventually emerged was therefore thoroughly stale; (ii) by that time the litigation had been ongoing for many years and CD had had the benefit of legal advice since 2005; (iii) in the period since July 1990 the appellants had lost touch with highly relevant witnesses whose evidence might have been expected to be consistent with their contemporaneous records; CD’s complaint had been uncorroborated, had come out of the blue in 2014, had contradicted previous statements and had been at variance with contemporaneous documents; (iv) on the judge’s own findings, the cogency of CD’s evidence had itself been affected by the passage of time; and (v) although the judge had awarded CD an unquantified ‘modest allowance’ for minor physical assaults, it would not be proportionate to disapply the limitation period on that account. The appellants had accordingly been exposed to the real possibility of significant prejudice in their ability to defend the claim so long after the event, and without the ability to call relevant witnesses. The appeal would therefore be allowed, the judge’s decision to disapply the limitation period reversed, and judgment entered for the appellants (see [78]-[79] of the judgment). 

AB v Ministry of Defence [2010] All ER (D) 252 (Nov) applied; E v E [2015] All ER (D) 88 (Apr) applied; Carroll v Chief Constable of Greater Manchester Police [2017] All ER (D) 48 (Dec) applied.

(2) Whether the appellants had been prejudiced by a change in the law. 

The appellants had argued that they had been prejudiced by a change in the law during the period of delay as case law had considerably expanded the scope of vicarious liability and the ability of the respondent to disapply the limitation period 

The change in law relied on by the appellants had taken place before the expiry of the limitation period permitted by LA 1980 s 28, whether the underlying cause of action had been governed by LA 1980 s 11 or s 2 of the Act (see [37] of the judgment).

Further, a decision of a higher courts had retrospective effect. The possibility that the common law might be changed with retrospective effect was not a legitimate reason for refusing to exercise the discretion under s 33 in a claimant’s favour. Still less was it legitimate when what had been changed was not the common law, but the interpretation of a statutory provision that had been in force during the whole of the relevant period in exactly the same terms (see [74]-[75] of the judgment)

Congregation of the Poor Sisters of Nazareth v Scottish Ministers [2015] CSOH 87 distinguished; Kleinwort Benson Ltd v Lincoln City Council [1998] All ER (D) 518 considered; A v Hoare and other appeals [2008] All ER (D) 251 (Jan) considered; A v Wirral Metropolitan Borough Council [2008] All ER (D) 61 (Jul) applied; Murray v Devenish (Provincial Superior of the London Province of the Sons of the Sacred Heart of Jesus sued on his own behalf and as a representative of all other members of the unincorporated association known as the Sons of the Sacred Heart of Jesus) [2018] All ER (D) 30 (Aug) considered; Lister v Hesley Hall Ltd [2001] All ER (D) 37 (May) considered.

(3) Whether the judge gave sufficient weight to the mistake of fact in the respondent’s evidence. 

The appellants also argued that the judge had failed to give sufficient weight to the fact that the respondent had given evidence suggesting that he had only been seen by the expert for 10 or 15 minutes rather than one-and-a-half or two hours, having found that the respondent had been mistaken. 

The fact that a claimant made a mistake in evidence was not a weighty mater in the exercise of discretion under s 33 (see [76] of the judgment).

Per curiam: ‘The judge had considered the period of delay for the purposes of s 33(3) of the Limitation Act 1980 as the seven-year delay in issuing proceedings, taking as its starting point the expiry of the limitation period permitted under s 28, i.e. three years after the respondent had attained his majority. Although both counsel had been prepared to accept that the period of delay to be considered under that head did not begin until the expiry of the time allowed by s 28, the Court had serious reservations whether that was the correct period and considered that the cogency of the evidence ought to be assessed under s 33(3)(b) by comparison with what the evidence would have been if brought within the time allowed by s 11, not within the time allowed by section’ (see [48] of the judgment). 

Michael Kent QC and  Nicholas Fewtrell (instructed by Keoghs LLP) for the appellant.

Hugh Preston QC and Susannah Johnson (instructed by Switalskis LLP) for the respondent.

Tara Psaila - Barrister.

The judge incorrectly exercised his discretion to disapply the limitation period under the Limitation Act 1980 in a historic sexual abuse case. The Court of Appeal, Civil Division, re-exercised the discretion and allowed the appellants appeal. 

Background

The proceedings concerned the administration of Lehman Brothers International (Europe) (LBIE) and related to a dispute between LBIE’s administrators (the LBIE administrators) and another company in the Lehman Group, Lehman Brothers Australia Ltd (LBA), acting through its joint liquidators (the LBA liquidators). 

LBA was an unsecured net creditor of LBIE. On 15 September 2008, LBIE entered administration in England. On 2 October 2009, LBA entered liquidation in Australia. Prior to their collapse, both companies had been ultimately controlled by Lehman Brothers Holdings Inc. 

LBIE, acting through the LBIE administrators, submitted a proof of debt in LBA’s liquidation, claiming some AUD109,904,780. Subsequently, LBA, acting through the LBA liquidators, submitted a proof of debt in LBIE’s administration. 

The cross-claims between LBIE and LBA gave rise to complex questions of valuation, requiring agreement as regards relevant valuation dates, principles and pricing sources to be applied. The LBIE administrators and the LBA liquidators sought to agree the claims arising between their respective estates. That required the office-holders to carry out an accounting reconciliation exercise. 

LBIE and LBA, acting through their respective office-holders, contractually agreed, in a claims determination deed (the LBA CDD), dated 12 March 2014 (see [24] of the judgment), that LBA had a net unsecured provable claim against LBIE for £23,355,508 (the sum), and that that claim should be admitted for dividend from LBIE’s estate. The LBA CDD was governed by English law and was subject to exclusive English jurisdiction.

In April 2014, the LBIE administrators made a distribution to LBA in the sum of £23,355,508, which LBA accepted.

Subsequently, LBA contended that there had been an error in the calculation of the sum, due to an innocent mistake. It applied to the court for directions, contending that the LBIE administrators should be directed to admit a claim by LBA in a greater sum than that which the parties, through their respective office-holders, had contractually agreed under the LBA CDD. 

Application dismissed.

Issues and decisions 

Whether the LBIE administrators should be directed to admit a claim by LBA in a greater sum than that which LBIE and LBA had, acting through their respective office-holders, contractually agreed should be admitted for dividend in the LBA CDD. 

LBA submitted that the sum had been erroneously calculated and that its claim, properly calculated, was £25,028,091.44. It argued that, since the error had been discovered, and it being undisputed that it was the product of simple arithmetic miscalculation, it would be unfair for the LBIE administrators to take advantage of it. 

The LBA liquidators contended that the error referred to was the consequence of a common mistake when applying the agreed methodology. However, they did not apply for rectification. Instead they contended that the court could conveniently correct the common mistake by making the directions sought.

Consideration was given to: (i) the court’s jurisdiction to prevent unfair harm pursuant to para 74 of Sch B1 to the Insolvency Act 1986 (IA 1986), which empowered the court to grant relief where the administrator was acting,al or had acted, so as to unfairly harm the interests of the applicant or proposed to act in a way which would unfairly harm the interests of the applicant.

The question, in essence, was whether, and if so in what circumstances, the court might direct its officers not to enforce contractual commitments freely entered into. The court considered a number of authorities, including the rule in Re Condon, ex Parte James [1874-80] All ER Rep 388  (ex Parte James). That case concerned an expression, in insolvency law, of the court’s insistence that, in the exercise of their special powers, its officers should not retain money or benefits if and when its retention would be against all conscience, even if there was no remedy against them for its recovery at law. 

There was no reason or justification for not giving effect to contractual obligations freely entered into, unless, under the existing law, the contract could and should be reformed or rectified or otherwise invalidated (see [84] of the judgment).

In the cases following ex parte James, at least until Re Clark[1975] 1 All ER 453, the discretionary jurisdiction (which the rule expressed to prevent the enforcement of legal right when it would be contrary to ‘natural justice’) was not to be used (in the words of Salter J in Re Wigzell [1921] 2 KB 835 ‘unless the result of enforcing the law is such that, in the opinion of the court, it would be pronounced to be obviously unjust by all right-minded men’. 

While, in certain contexts, especially with regard to fair process, ‘natural justice’ might be synonymous with fairness (or nearly so), in other contexts it was not.

The phrase ‘contrary to natural justice’ connoted more than subjective unfairness: it connoted that what was proposed would be such that undoubtedly a ‘high-minded’ and ‘honourable’ man would not do it because it would be ‘dishonourable and not high-minded’ (see [61] of the judgment).

The test which emerged from Re Wigzell was not unfairness, but was whether what was proposed would be ‘pronounced to be obviously unjust by all right-minded men’. The control of power vested in a person by statute or convention was one thing; the overriding of contractual rights otherwise enforceable at law was quite another. There was a clear distinction between subjecting the exercise of power or legal right to equitable constraints, on the one hand, and, on the other hand, deploying a discretionary jurisdiction to alter or undo a contractual bargain (see [61] of the judgment).

It was accepted in authority that the exercise of legal rights vested by statute in an office-holder (being an officer of the court) might be prevented or controlled if otherwise that exercise would be contrary to natural justice: that was very different from extending that control to the case of the exercise of legal rights and obligations conferred and engaged by contract, which would negate or at least alter the parties’ bargain by reference to some free-standing and subjective notion of fairness or propriety (see [61] of the judgment).

The occasions when the exercise of, or reliance on, such a legal right would be pronounced to be obviously unjust by all right-minded men were few and far between and probably confined to circumstances where any honest man would disclaim any such right or consider it dishonourable to assert it, but there was a gap in the law, and the law itself provided no recourse against its assertion. The obvious examples being mistake of law and receipts from third parties. 

Where the law itself provided a remedy or recourse it was difficult to see any room for a free-ranging alternative jurisdiction (see [61] of the judgment).

Further, para 74 of Sch B1 did not justify any broader approach to the rule in ex Parte James. While it was accepted that there was some overlap between the two bases of jurisdiction to control administrators as officers of the court, they were differently focused. Paragraph 74 concerned the misuse or abuse of the powers vested in an administrator for the purpose of conducting the administration: it provided for the intervention of the court to control or prevent the exercise of the powers so vested. It was neither intended as a procedure or mechanism for the imposition of overriding moral constraints on the exercise of legally enforceable contractual rights, nor to prevent the unjust enrichment of the estate (see [61] of the judgment).

The test in para 74 was not synonymous with unfairness: it connoted differential or discriminatory conduct of power such as to disadvantage the complainant. The rule in ex parte James, on the other hand, focused, at least primarily, on the restriction of legal rights where their assertion by the office-holder would result in the unjust enrichment of the estate (see [61] of the judgment).

Conduct, such as ‘unfairly to harm’ a creditor (under para 74), meant the exercise of the office-holder’s powers in a manner which (i) caused or would cause disadvantage to that creditor; (ii) could not be justified by reference to the interests of the creditors as a whole or to achieving the objective of the relevant insolvency process; and/or which (iii) was discriminatory in such effect. The test in para 74 focused on the conduct (past or proposed) of an office-holder in the exercise of his powers as such (see [76]-[78] of the judgment).

In the present case, there was no basis, under para 74 of Sch 3 or under the rule in ex Parte James, for the court’s intervention in the manner sought by LBA (see [80], [82] of the judgment).

The case was always a case of ‘rectification or bust’. No application for rectification had been brought and the court should proceed on the basis that it was not available (see [84] of the judgment). 

However, even if the rule in ex Parte James or para 74 of Sch 3 did enable the court to intervene to override a contractual commitment, or impose equitable constraints on the exercise of a contractual right derived from a freely-entered bargain, simply on the ground of ‘unfairness’, it would not be right to exercise such jurisdiction in the present case. The LBA CDD had been entered into in order to define the agreed claim amount with certainty and finality. It had been drafted in a way, and with terms, specifically designed to prevent the agreed claim amount from being reopened and expressly released any other or further claim. It provided for transferability of the admitted claim in the agreed amount on that basis. Even if, as a result of the Lehman scheme (of arrangement), there was no longer a risk that the outcome of the present application could set a precedent which would enable other creditors of LBIE, otherwise bound by a CDD, to re-open their entitlement, that was not so when the application had been brought and, in any event, did not justify a single erosion of the finality intended. Lastly, the agreed claim amount had been admitted to proof and had been paid in full (on 30 April 2014). The account had been agreed and settled. Assuming that the contract could not be reformed or rectified, there was no unfairness in enforcing it in accordance with its terms (see [85] of the judgment).

The siren call to exercise jurisdiction on the footing that the mistake and its source were not disputed and its correction would not, in the events that had happened, ‘open the floodgates’ to other creditors to undo their CDDs, or otherwise undo the general benefit of the finality brought by the CDDs, was not accepted. It was not satisfactory for the assertion and exercise of jurisdiction that there were special circumstances such that, this time, no harm might be caused by its exercise (see [83] of the judgment).

Although it was accepted (and the LBIE administrators conceded) that, as a result of the Lehman scheme (sanctioned on 18 June 2018), there was no longer the risk, perceived and emphasised on behalf of the LBIE administrators at the hearing, that the outcome of the present application could set a precedent which would enable and might encourage other creditors to challenge their proofs, as LBA had sought to do, it did not follow that there was jurisdiction or that it should be exercised. In other cases, just such encouragement might be given: the importance of restricting a jurisdiction which could threaten the stability and reliability of contracts intended to define the parties’ rights and ensure finality transcended the present case (see [64], [65] of the judgment).

Condon, Re, ex p James [1874-80] All ER Rep 388 not followed; Four Private Investment Funds v Lomas [2008] All ER (D) 237 (Nov) followed; Lomas v Burlington Loan Management Ltd; sub nom Re Lehman Brothers International (Europe) (in administration) [2015] All ER (D) 20 (Aug) distinguished; Heis and others v Financial Services Compensation Scheme and another [2018] EWHC 1372 (Ch) explained; Tyler, Re, ex p Official Receiver [1904-7] All ER Rep 181 considered; Hall, Re, ex p Official Receiver [1907] 1 KB 875 considered; Thellusson, Re, ex p Abdy [1918-19] All ER Rep 729 considered; Wigzell, Re, ex p Hart [1921] 2 KB 835 explained; Clark (bankrupt), Re, ex p trustee of property of bankrupt v Texaco Ltd [1975] 1 All ER 453 considered; TH Knitwear (Wholesale) Ltd, Re [1988] 1 All ER 860 considered; Walker v Hocking [1998] BPIR 789 considered; Presbyterian Church (NSW) v Scots Church Development Ltd [2007] NSWC 676 considered; Re Nortel GmbH (in administration) [2013] All ER (D) 283 (Jul) considered; Re Beppler & Jacobson Ltd TOC Investments Corporation v Beppler & Jacobson Ltd and others [2016] All ER (D) 37 (Jan) considered; Re Young; Allen (trustee in bankruptcy of Young) v Young [2017] All ER (D) 65 (Apr) considered; Tonicstar Ltd (on its own behalf and on behalf of the other corporate members of Lloyd’s Syndicates 62, 1861 and 2255) v Allianz Insurance plc (Formerly Cornhill Insurance plc) and another [2017] All ER (D) 46 (Nov) considered.

Philip Gillyon (instructed by Norton Rose Fulbright LLP) for LBA.

Daniel Bayfield QC and Ryan Perkins (instructed by Linklaters LLP) for the LBIE administrators.

Carla Dougan-Bacchus - Barrister.

Lehman Brothers Australia Ltd (LBA) failed in its application for an order directing the administrators of Lehman Brothers International (Europe) (LBIE) to admit a claim by LBA in LBIE’s administration, which was greater than that which the parties, acting through their respective office-holders, had contractually agreed, due to mistake in the calculation of claim. The Chancery Division held that there was no basis, under para 74 of Sch 3 to the Insolvency Act 1986 or under the rule in Re Condon, ex Parte James[1874-80] All ER Rep 388, for it  to intervene in the manner sought by LBA; that para 74 of Sch B1 did not justify any broader approach to the rule in ex Parte James; and that there was no reason or justification for not giving effect to contractual obligations which had been freely entered into, and in circumstances where the agreed claim amount had been admitted to proof and had been paid to LBA in full. 

Background

In 2006, the second respondent debtor granted a trust deed for his creditors. In July 2010, the appellant was assumed as the trustee. In November, the trustee paid the creditors a dividend of 22.41 pence in the pound. Subsequently, he received his discharge and in April 2011 he sent the accountant in bankruptcy, for registration in the Register of Insolvencies, a statement indicating how the estate had been realised and distributed, and a certificate to the effect that the distribution was in accordance with the trust deed, as required by para 9 of Sch 5 to the Bankruptcy (Scotland) Act 1985 (the B(S)A 1985). At the same time, the trustee also requested the accountant in bankruptcy to register his discharge in the Register of Insolvencies in accordance with B(S)A 1985 para 10 of Sch 5. However, unbeknown to the trustee, before the debtor had entered into the trust deed, he had been mis-sold payment protection insurance by a bank. In 2015, the debtor appointed the first respondent as his agent for the purpose of making a claim against the bank for the mis-selling of the PPI. He assigned to his agent 30% of the value of any compensation received. In April 2015, the bank agreed to pay compensation of around £56,000. The trustee claimed that he was entitled to payment of that sum, on the basis that the right to compensation had vested in him as part of the estate subject to the trust deed and remained vested in him as trustee.

The debtor and his agent sought a declaration that the compensation had not vested in the trustee, together with payment of the compensation from the trustee. The Lord Ordinary found in favour of the debtor and his agent. That decision was upheld by the Second Division of the Inner House.

The trustee appealed. 

Appeal dismissed.

Issues and decisions

Whether the trustee was entitled to property that had been discovered after the debtor’s estate had been distributed in partial payment of his debts, and he and his trustee had received their discharges.

A decision that a distribution was final, taken by the trustee under the present trust deed in accordance with his fiduciary duty, had to be regarded as definitive, subject to the possibility, of it being reduced. It followed, in the present case, that the trust had come to an end on 5 November 2010, that the debtor was then discharged of his debts, and that the former trustee, discharged later the same month, had no entitlement to the asset discovered in 2015 (see [21] of the judgment). 

The Inner House had reached the correct conclusion as to the construction of the trust deed. It had provided, in effect, for a composition between the debtor and the acceding creditors. That composition had been conditional on the final distribution of the estate by the trustee. It had been for the trustee, acting in accordance with his fiduciary duty towards the creditors, to determine when a final distribution should take place (see [11] of the judgment). 

Those considerations had not, in themselves, entailed that a final distribution, within the meaning of the trust deed, could take place, even through a part of the estate of which the trustee was unaware had not been distributed in payment of the debts. But the contrary argument - that a ‘final distribution’ only occurred, in the absence of the full payment of the debts, when all the assets transferred to the trustee under the trust deed had in fact been distributed, whether or not the trustee was aware of their existence - would have consequences which the debtor could not reasonably be taken to have intended when granting the deed (see [12] of the judgment). 

Whyte (Pauper) Appellant; and the Northern Heritable Securities Investment Company, Limited, and others Respondents. [1891] AC 608 distinguished.

Decision of Court of Session, Inner House [2016] CSIH 59 affirmed.

Michael Howlin QC and Gavin MacColl QC (instructed by Balfour + Manson LLP) for the trustee.

Gerry Moynihan QC and David Bartos (instructed by BTO Solicitors LLP) for the debtor and his agent.

Paul Mclachlan - Barrister.

The Lord Ordinary had not erred in holding that a decision, taken by the trustee under the trust deed in accordance with his fiduciary duty, that a distribution of a debtor’s estate was final, had to be regarded as definitive. Accordingly, the Supreme Court dismissed the appellant trustee’s appeal that related to whether he was entitled to property that had been discovered after his and the second respondent debtor’s discharge.

Legislation

Section 112 of the Financial Services and Markets Act 2000 (FSMA 2000), so far as material, provides: ‘(1) If the court makes an order under section 111(1), it may by that or any subsequent order make such provision (if any) as it thinks fit (a) for the transfer to the transferee of the whole or any part of the undertaking concerned and of any property or liabilities of the transferor concerned; (b) for the allotment or appropriation by the transferee of any shares, debentures, policies or other similar interests in the transferee which under the scheme are to be allotted or appropriated to or for any other person; (c) for the continuation by (or against) the transferee of any pending legal proceedings by (or against) the transferor concerned; (d) with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out.’

Background

The applicants, Barclays Bank plc (BB) and Barclays Bank Ireland plc (BBI), applied for directions in connection with an application, pursuant to Pt VII of FSMA 2000, for the sanction of a banking business transfer scheme (the scheme). 

The scheme formed part of Barclays’ planning for the continuity of service provision to its clients in the European Economic Area (EEA), following the withdrawal of the UK from the European Union (Brexit). It was proposed that, pursuant or ancillary to the scheme, two wholly owned subsidiaries within the Barclays Group would transfer a part of their business to BBI. Those entities were BB, an English incorporated public limited company, and Barclays Capital Securities Ltd (BCSL), an English incorporated private limited company. 

The application was premised on the assumption that, post-Brexit, BB and BCSL would no longer be authorised to conduct business in the EEA. The purpose of the scheme was to transfer the relevant parts of their businesses relating to EEA clients to BBI which, being an Irish incorporated company, would continue to be authorised to conduct business in the EEA post-Brexit.

The application sought directions as to notification of the proposed scheme and for the adjournment of the application to a hearing before a judge of the Companies Court in January 2019, for the purposes of sanctioning the scheme.

Application allowed.

Issues and decisions

Whether, there was jurisdiction under FSMA 2000 s 112(1) to order the transfer of BCSL’s business to BBI. 

In order for a scheme to qualify as a banking business transfer scheme within FSMA 2000 s 106, it had to be one under which ‘the whole or part of the business to be transferred includes the accepting of deposits’ and it had to satisfy the condition that (in the case of a UK authorised person) ‘the whole or part of the business carried on by a UK authorised person who has permission to accept deposits (the transferor concerned) is to be transferred to another body (the transferee)’. 

BB was authorised to accept deposits, but BCSL was not. The business to be transferred by BB included the accepting of deposits, but the business to be transferred by BCSL did not. Accordingly, while the court had jurisdiction under FSMA 2000 s 106 to sanction the scheme in respect of the transfer by BB of part of its business, it had no jurisdiction under the section to sanction it in respect of the transfer by BCSL of part of its business. 

The applicants submitted that the transfer of BCSL’s business was within the ambit of s 112(1)(d) and that, according to caselaw, the phrase ‘necessary to secure that the scheme is fully and effectively carried out’ was to be construed broadly.

The court considered three possible objections to the scheme, namely that: (i) it was not possible to use s 112(d) to effect a transfer of the business of a third party entity, where that entity’s business did not include accepting deposits, and so could not be transferred under a scheme within FSMA 2000 s 111; (ii) the transfer of BCSL’s business could not be said to be ‘necessary’ to secure that the scheme was fully and effectively carried out; and (iii) the transfer of BCSL’s business could not be regarded as ‘incidental, consequential or supplementary’ to an order made under s 111, transferring BB’s business. 

Concerning the first possible objection, s 112(1)(d) was sufficiently broad in scope to permit the court to make orders which modified the contractual and other rights as between clients of the business of BB which was transferred under the scheme and a third party, such as BCSL, provided that the requirements of the sub-paragraph itself were met. In that way, the jurisdiction under the section was broad enough to include orders having the effect of transferring the relevant part of the business of BCSL to BBI (see [47] of the judgment).

A scheme did not fall within s 111, unless the ‘transferor concerned’ had permission to accept deposits and the whole or part of the business to be transferred included the accepting of deposits (see s 106). Where the scheme fell within s 111, the transfer of business might be effected by a court order which had the result of vesting property of the transferring entity in the transferee and transferring the liabilities of the transferring entity to (so that they became the liabilities of) the transferee (see ss 112(1)(a) and 112(3)) (see [36] of the judgment). 

While the satisfaction of the requirements in s 106 were necessary in order for a scheme to qualify for sanction under s 111, the content of the scheme to be sanctioned was not limited to the transfer of the transferring entity’s deposit taking business. Section 106(1)(b) expressly contemplated that part only of the transferred business included the accepting of deposits. On a plain reading of the provisions, when considering whether a particular order under s 112(1)(d) was necessary to secure that ‘the scheme’ was fully effective, what was meant was the scheme as a whole, and not merely that part of it which involved the transfer of a deposit taking business (see [37] of the judgment).

The opening words of s 112 were sufficiently broad to encompass any kind of order: ‘such provision (if any) as [the court] thinks fit’. The subsection contained a sufficient mechanism to limit its scope (in the language: ‘necessary to secure’), such that there was no need to impose any other limitation on the scope of the orders that could be made. If the focus was on the constituent elements that made up such a transfer, and the orders required to give effect to them, then there was sufficient support in the existing authorities to justify the use of s 112(1)(d) for that purpose (see [41]-[45] of the judgment). 

It followed that the limitations on the scope of orders that could be made under s 112(1)(d) were to be found within it, namely that such an order had to be incidental, consequential or supplementary to the scheme, and had to be necessary to secure that the scheme was fully and effectively carried out (see [46] of the judgment). 

Concerning the second possible objection, one of the matters for the court to determine, on the basis of the evidence adduced on the application to sanction the scheme, would be whether the degree of interconnectedness between clients’ relationships with BB and with BCSL and the consequences of not making an order under s 112(1)(d), transferring BCSL’s business, were, in fact, sufficient to persuade the court to exercise its discretion to make such an order (see [48] of the judgment).

On the basis of that assumption, the transfer of BCSL’s business was capable of being ‘necessary to secure that the scheme is fully and effectively carried out’. The purpose of the scheme was to enable the business currently conducted by BB to be carried on seamlessly in the event of BB’s loss of authorisation to conduct business in the EEA post-Brexit. For the purposes of determining whether the transfer of BB’s business could be fully and effectively carried out, it was essential to consider whether it would result in BBI being able to conduct, as a matter of practical reality, the business currently carried on by BB. If, as the evidence suggested, that would not be possible in the event of a no-deal Brexit (without the considerable expense and potential difficulties inherent in multiple bilateral agreements with each affected client), but it could be achieved by a transfer of BCSL’s business to BBI, then the order sought could be described as ‘necessary’ within the meaning of s 112(1)(d) (see [52], [54] of the judgment).

Concerning the third possible objection, whether a particular matter could be described as ‘incidental’, ‘consequential’, or ‘supplementary’, to the scheme sanctioned under s 111 was a fact sensitive enquiry. Accordingly, the only question for the court, at the present stage, was whether the transfer of a part of BCSL’s business was incapable of being so described. In the circumstances, it was not as impossible to describe the transfer of BCSL’s business as such, in the context of the present case (see [55], [56] of the judgment). 

If followed that an order to transfer the business of BCSL to BBI was capable of falling within the jurisdiction of s 112(1)(d). Whether it would be proper to make such an order in the present case was a matter to be determined on the basis of the facts as presented at the hearing to sanction the scheme (see [57] of the judgment). 

The principal direction sought was for the publishing of a notice in a variety of publications. Those included – but went beyond – the bare minimum required by regs 5(2) and 5(3) of the Financial Services and Markets Act 2000 (Business Transfers) (Requirements on Applicants) Regulations 2001, SI 2001/3625, of publishing notices in the Gazettes in London, Edinburgh and Belfast, and in two national newspapers. The form of the notice had been approved by the Prudential Regulation Authority. Accordingly, the direction sought would be made (see [58] of the judgment).

Re Barclays Bank Plc and Others v Re Four Intended Applications Under Part VII of the Financial Services and Markets Act 2000 [2018] 1 All ER 893 followed; Re Consolidated Life Assurance Co Ltd unreported, 11 December 1996 distinguished; Norwich Union Linked Life Assurance Ltd, Re [2004] All ER (D) 21 (Dec) distinguished; Re Barclays Bank plc and another [2018] All ER (D) 74 (Mar) distinguished; Re Hill Samuel Life Assurance Limited [1995] Lexis Citation 1831 considered; Re Alliance & Leicester plc [2010] EWHC 2585 (Ch) considered; Re The Copenhagen Reinsurance Company (UK) Ltd [2016] All ER (D) 25 (May) considered; Re AIG Europe Ltd and other companies [2018] All ER (D) 02 (Nov) considered.

Martin Moore QC and Stephen Horan (instructed by Clifford Chance LLP) for the applicants.

Carla Dougan-Bacchus - Barrister.

Barclays Bank plc (BB) and Barclays Bank Ireland plc (BBI) applied for directions in connection with an application under the Financial Services and Markets Act 2000 (FSMA 2000) for the sanction of a banking business transfer scheme, as part of Barclays’ planning for the continuity of service provision to its clients in the European Economic Area, following Brexit. The Companies Court ruled that an order to transfer the business of Barclays Capital Securities Ltd (an English incorporated subsidiary company in the Barclays Group, which was not authorised to accept deposits), to BBI (an Irish incorporated company in the group) was capable of falling within the jurisdiction of FSMA 2000 s 112(1)(d), because the transfer was capable of being ‘necessary to secure that the scheme is fully and effectively carried out’. Accordingly, the court granted the principal direction sought, which was for the publishing of a notice in a variety of publications.

Background

The appellant companies (together, AIG) were part of the AIG Group, one of the world’s largest insurance groups. It had operated in Europe through the first applicant company, AIG Europe Ltd (AEL), which was an English company based in London. AEL presently had total assets of about £16.7bn.

The AIG Group concluded that, in light of the uncertainty that any Brexit deal struck between the UK and the EU would preserve passporting rights, it had to restructure AEL’s operations without further delay, in order to ensure that AIG could continue to service its existing business and write new business across the UK and the rest of Europe after Brexit. 

It sought to transfer the UK and non-European Economic Area business written by its UK offices to a new English company, American International Group UK Ltd (AIGUK), which would operate from London under the supervision of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (together, the regulators). AEL would then transfer the remainder of its business and its network of European branches to a new Luxembourg company, AIG Europe SA (AESA).

Because the scheme in issue (the scheme) included transfers of insurance business by AEL to AESA and AIGUK, it required the approval of the court pursuant to ss 104 and 111 of Part VII of the Financial Services and Markets Act 2000 (FSMA 2000). AIG applied for that approval.

Application allowed.

Issues and decisions

(1) Whether it was permissible for the court to sanction an insurance business transfer scheme under FSMA 2000 Pt VII where the transfer of the insurance policies in question was to be achieved in part by an order under FSMA 2000s 112(1)(a) and in part by means of a cross-border merger under the codified Directive (EU) 2017/1132 relating to certain aspects of company law (the Directive) and The Companies (Cross-Border Mergers) Regulations 2007 SI 2007/2974 (the Regulations).

The power under FSMA 2000 s 112(1)(d) had to be exercised bearing in mind that a primary purpose of FSMA Pt VII was been the protection of policyholders, and that the power to secure that a transfer scheme was fully carried out indicated that the court had the jurisdiction to go beyond the bare minimum without which the independent expert would withdraw his support for the scheme (see [23] of the judgment).

The transfer of rights and liabilities of AEL that would occur on the effective date set for the cross-border merger by the authorities in Luxembourg in accordance with arts 129 and 131 of the Directive was a means by which, subject to sanction under FSMA 2000 s 111(1), a relevant transfer of that insurance business could lawfully be carried into effect under FSMA 2000 Pt VII. The use of the cross-border merger also did not in any way limit or restrict the court from considering whether or not to sanction the scheme under FSMA 2000 s 111 (see [34] of the judgment).

Norwich Union Linked Life Assurance Ltd, Re [2004] All ER (D) 21 (Dec) considered; Pearl Assurance (Unit Linked Pensions) Ltd, Re [2006] All ER (D) 72 (Sep) considered; Re The Copenhagen Reinsurance Company (UK) Ltd [2016] All ER (D) 25 (May) considered.

(2) Whether, and if so, to what extent, the court could make ancillary orders under FSMA 2000 ss 112(1)(c) and (d) in relation to (i) the transfer of business to AIGUK and (ii) the transfer of business to AESA.

There was no reason why the court ought not to be entitled to make an order under FSMA 2000 s 112(1)(c) in relation to the continuation of proceedings and claims by and against AESA. That was because the condition to the court’s power to make an order under FSMA 2000 s 112(1)(c) was simply that it should have made an order sanctioning the transfer scheme under FSMA 2000 s 111(1); and the definition of a transfer scheme which was capable of being sanctioned under FSMA 2000 s 111(1) could include a transfer of assets and liabilities as a result of a cross-border merger. Put another way, provided that the scheme in question fell within s 111(1), the availability of the power under FSMA 2000 s 112(1)(c) did not depend on the making of an order under s 112(1)(a) (see [38] of the judgment).

Provided that the order related to the scheme to be sanctioned under FSMA 2000 s 111(1), there was no objection to making such an order in the general form sought (see [39] of the judgment).

In that regard, one particular feature of the scheme was that where existing policies covered risks in both the UK and EEA, those policies ought, in effect, to be subject to a ‘split’ transfer so that AIGUK and AESA would have separate responsibility for the relevant risks transferred to them on the terms of the original policies, but policy limits and deductibles would be aggregated between the two new policies so that policyholders would not be any better or worse off in respect of such contractual terms after the scheme took effect. There was no reason in principle why such provisions should not work if given effect by an order made under FSMA 2000 s 112(1)(d), and such an order was plainly necessary to ensure that the scheme was fully and effectively carried out (see [40] of the judgment).

(3) Whether and, if so, how, Brexit would affect the merger. Although the outcome of the Brexit negotiations between the EU and the UK remained unclear, they had required AEL and the independent expert to consider as fully as possible the potential implications and risks to policyholders associated with the UK’s withdrawal from the EU in the context of the proposed scheme. The regulators had also indicated that, notwithstanding the uncertainty, they had expected full consideration to be given to ‘possible mitigations and solutions to minimize any policyholder detriment arising from the scheme’ (the approach).

That approach was entirely appropriate (see [43] of the judgment).

It was reasonable for AEL to be concerned about the possible prejudice caused by a long period of negotiation, or the effects of a ‘hard Brexit’. Consequently, in applying the relevant tests, it was necessary to balance the risk of prejudice to a large body of policyholders in the EEA and Switzerland if the scheme was not to be sanctioned, against any potential risk of prejudice to individual policyholders under the terms of the proposed scheme (see [45], [46] of the judgment).

The fundamental question was whether the proposed scheme, as a whole, was fair as between the interests of the different classes of persons affected. The current uncertainty over Brexit meant that there might be no perfect solution for the holders of the policies being transferred to AESA, and the possibility that some individual policyholders or groups of policyholders could be adversely affected in certain respects, did not mean that the scheme necessarily had to be rejected by the court (see [46] of the judgment).

The scheme was entirely fair regarding the different groups of policyholders and did not cause them any material prejudice. The requirements in FSMA 2000 s 111 for sanction of the scheme had been met, and an order would be made to that effect. An order would also be made under s 112 giving effect, where required, to the transfer of assets and liabilities to AIGUK, to the continuation of legal proceedings and other claims against both AIGUK and AESA, and to the other provisions of the scheme (see [85] of the judgment).

Martin Moore QC (instructed by Freshfields Bruckhaus Deringer LLP) for the AIG Group.

Toby Frost - Barrister.

The applicant group of companies, which were part of the AIG Group, succeeded in their application for the approval of a scheme of arrangement. The AIG Group sought to reorder the structure of its insurance services in the UK, in the wake of the Brexit decision and the uncertainty it had caused. The Companies Court held that the scheme was entirely fair regarding the different groups of policyholders and did not cause them any material prejudice.