IN THE MATTER OF EURO BANK CORPORATION (IN LIQUIDATION) 13-May-2003
[2003 CILR 205]
IN THE MATTER OF EURO BANK CORPORATION (IN LIQUIDATION)
GRAND COURT (Henderson, Ag. J.): May 13th, 2003
Companies—arrangements and reconstructions—“compromise or arrangement”—scheme whereby creditors set aside contractual rights to interest in exchange for interest calculated in accordance with scheme, so that some creditors forfeit interest whilst others receive it without prior entitlement, is “compromise or arrangement” under Companies Law (2002 Revision), s.86(1), to consider which court may summon creditors’ meeting
Companies—arrangements and reconstructions—sanction by court—“classes” in scheme for payment of post-liquidation interest to depend on similarity or dissimilarity of participants’ rights against company and scheme’s effect on those rights—group accepted as “class” if no practical way to sub-divide
The liquidators of a bank applied for the court to convene creditor and shareholder meetings to consider a proposed compromise or arrangement for the payment of post-liquidation interest to admitted creditors.
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All the admitted creditors had either been, or were about to be, paid in full on their claims to principal. The liquidators of the bank also proposed a compromise or arrangement for the payment of post-liquidation interest to them and any surplus thereafter to the shareholders. Many of the creditors were entitled to interest under their pre-liquidation contracts with the bank, but some were not, and the precise rates applicable to each creditor would be difficult to ascertain. The proposed scheme reduced the time and cost of the liquidators’ task of calculating post-liquidation interest. Under the scheme, the various amounts and rates of post-liquidation interest payable under contract would be replaced by that proposed in the scheme, with the result that some creditors would receive less interest than their contractual entitlement whilst others would receive more. The liquidators applied under the Companies Law (2002 Revision), s.86(1) for the court to convene class meetings of “scheme participants” (comprising depositors and trade creditors) and of shareholders.
Held, convening the scheme meetings:
(1) The scheme proposed, under which creditors would be asked to set aside their contractual rights to interest in exchange for interest calculated in accordance with the scheme, meant that some creditors would receive less than their contractual right to interest, whilst others would receive more. It was, in substance, a “compromise or arrangement,” under the Companies Law (2002 Revision), s.86(1), and the court therefore had jurisdiction to give directions for the consideration of the proposed scheme (
para. 8).
(2) The general rule for the determination of “classes” in a scheme was that they should depend on the similarity or dissimilarity of the participants’ rights against the company and the way in which those rights were affected by the scheme. The test was not based on the similarity or dissimilarity of other private rights. Under the proposed scheme, the “shareholders” clearly comprised a class whose legal rights against the company were sufficiently similar that they could consult effectively together. The “scheme participants” was a more difficult class to determine, however, as it included depositors and trade creditors with differing interests under their contracts. Nevertheless, to sort those creditors further—into two classes, according to whether they would receive more or less under the proposed arrangement than they would under their pre-liquidation contractual entitlements—would require the carrying out of the very exercise the arrangement was designed to avoid, namely the calculation of individual entitlements to post-liquidation interest. As there was no practical way to sub-divide the group, “scheme participants” could comprise a class (
paras. 9–10;
paras. 12–13).
Cases cited:
(1) Humber Ironworks & Shipbuilding Co., In re (1869), L.R. 4 Ch. App. 643, dicta of Giffard, L.J. applied.
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(2) Lines Bros. Ltd., In re, [1983] Ch. 1; [1982] 2 All E.R. 183, considered.
(3) UDL Argos Engr. & Heavy Indus. Co. Ltd. v. Li Oi Lin, [2001] 4 H.K.C.F.A.R. 358, dicta of Lord Millett applied.
Legislation construed:
Companies Law (2002 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 2002), s.86(1):
“Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application of the company or of any creditor or member of the company, or where a company is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the Court directs.”
Grand Court Rules, 1995 (Revised), O.102, r.21(3)(b):
“The summons under paragraph (2) shall be supported by an affidavit which shall—
(b) contain such information as may be necessary to enable the Court to determine whether it should convene class meetings and, if so, the composition of the classes …”
Practice Direction cited:
A.J. Jones, Q.C. and C.D. McKie for the applicant.
1 HENDERSON, Ag. J.: Upon an ex parte application by the joint liquidators of the bank, I have authorized the payment of a final dividend to the admitted creditors at the rate of 20 cents on the dollar. This results in full payment of what is owed to the depositors and trade creditors. The bank is also proposing a compromise or arrangement (described below) with its creditors, under s.86(1) of the Companies Law (2002 Revision). I have approved the convening of a meeting of the scheme participants and given certain directions establishing a procedure for consideration of the proposed scheme. These reasons explain two aspects of my decision.
Post-liquidation interest
2 The proposed compromise or arrangement with the creditors is somewhat unusual, in that it involves only the payment of post
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liquidation interest. Under their pre-liquidation contractual arrangement with the bank, many of the depositors and trade creditors are entitled to the payment of interest, but some are not. In those cases where such interest would be payable, a myriad of different arrangements has been made.
3 The applicant has satisfied me that making a precise calculation of interest entitlement in the case of each individual depositor would be time-consuming, difficult and necessarily based upon arguable assumptions. In many cases, the amount of interest owing under a depositor’s individual contractual arrangement with the bank would not differ to any significant degree from the amount the depositor would receive in the proposed scheme. The expense to the bank, however, in addressing the interest claims of the depositors individually would be likely to be substantial. The bank proposes that the claims of the creditors to post-liquidation interest be the subject of a compromise or arrangement.
4 The liquidators have determined that, prior to liquidation, the bank was paying interest to its depositors at a certain average discount from the US Federal Reserve rate. Applying this average discount to the US Federal Reserve rates in effect during various periods subsequent to liquidation, the liquidators have calculated cumulative discounted interest rates, which the bank might be assumed to have paid during these periods. The liquidators propose that each account at the bank (other than those with debit balances) be placed in one of four categories, differentiated according to the size of the account balance, and as between preferred and non-preferred dividends. The actual rate at which interest will be paid on each account is determined by the category in which the account is placed. These rates have been calculated so that the cumulative weighted average of interest payable under the proposal is the same as the cumulative average discounted interest rate mentioned above. The scheme greatly simplifies the liquidators’ task of paying post-liquidation interest, with an attendant saving on the cost of the liquidation.
5 A threshold issue I was asked to address is whether this proposal amounts to a “compromise or arrangement” between the company and its creditors at all. If it does not, the court has no jurisdiction to give directions under s.86(1) of the Companies Law (2002 Revision). That question, in turn, cannot be answered until it is established that creditors of a company in liquidation, who have received 100 cents on the dollar on the principal debt, are also entitled to post-liquidation interest. Counsel says there is no Cayman authority on point.
6 This question arose in England in In re Humber Ironworks & Shipbuilding Co. (1), where it was uncertain, at the time of the ruling, whether the liquidation would yield sufficient funds to pay all of the company’s debts. Consequently, the court had to consider the question on
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two bases—on the assumption that there would ultimately be a surplus after payment in full of the debts, and on the assumption there would be no surplus. After considering the latter situation, the court established this rule (L.R. 4 Ch. App. at 647, per Giffard, L.J.):
“. . . [W]here the estate is solvent … as soon as it is ascertained that there is a surplus, the creditor whose debt carries interest is remitted to his rights under his contract; and, on the other hand, a creditor who has not stipulated for interest does not get it.”
The rule does not appear to have been doubted since. It was treated as settled law in In re Lines Bros. Ltd. (2), for example.
7 Since the creditors are now remitted to their contractual rights, many of them are entitled to post-liquidation interest. I am satisfied that the law of the Cayman Islands recognizes an entitlement to post-liquidation interest in depositors and creditors whose contracts provide for it.
8 The scheme proposed here asks those depositors and creditors with a contractual right to interest to set those rights aside, in exchange for an interest payment calculated in accordance with the arrangement. For some creditors that means giving up a right to interest to which they would otherwise be entitled. For others, it will mean receiving an interest payment larger than their contractual entitlement and, in some cases, receiving such a payment where there was no entitlement at all. I am satisfied that this scheme is, in substance, a “compromise or arrangement” between the bank and its creditors, of the sort contemplated by s.86(1) of the Law. The court therefore has jurisdiction to give directions for the consideration of the proposed scheme.
Definition of classes
9 The second question is the definition of the relevant classes. The general rule, as stated in UDL Argos Engr. & Heavy Indus. Co. Ltd. v. Li Oi Lin (3) ([2001] 4 H.K.C.F.A.R. at 367, per Lord Millett) is that—
“the principle upon which the classes of creditors or members are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the Scheme, and not upon the similarity or dissimilarity of their private interests arising from matters extraneous to such rights.”
10 The Hong Kong Court of Final Appeal went on to set out certain principles derived from a “consistent line of authority.” The following three principles are pertinent (ibid., at 372, per Lord Millett):
“1. Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given
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separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.
2. The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.
3. The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.”
(These paragraphs were numbered 2, 3 and 4 in the original.)
11 This court is required to define the relevant classes by O.102, r.21(3)(b) of the Grand Court Rules and Practice Direction No. 1/02, s.3.2. The liquidators propose just two classes: the shareholders and the scheme participants.
12 It is clear that the shareholders constitute a class whose legal rights against the company are sufficiently similar that they can consult together effectively on the scheme for the payment of post-liquidation interest. Their case poses no difficulty.
13 The scheme participants are the depositors and the trade creditors. It must be conceded that there is a certain divergence of interest within this proposed class. Some members of the class will receive more post-liquidation interest than their contracts with the bank would have allowed, while others will receive less. Yet, to sort the creditors into two classes according to whether they will receive more or less under the proposed arrangement would require the very exercise which the arrangement is designed to avoid—the calculation of individual post-liquidation interest entitlement. That, of course, would defeat the purpose. Once it is recognized, as I do, that there is no practical way to sub-divide the scheme participants, the natural conclusion is that they do comprise a relevant class.
14 For these reasons, I determine that the relevant classes are the shareholders and the scheme participants, as defined by the liquidators on the application.
Order accordingly.
Attorneys: Maples & Calder for the applicant.