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Focus: Insolvency – August 2006

Schemes of arrangement: can a personal injury claimant be a contingent creditor without an accrued cause of action?

In brief: Partner Michael Quinlan(view CV) and Overseas Practitioner* Christopher Prestwich discuss the implications of an English High Court decision, which considers whether a scheme of arrangement can bind possible future claims by individuals who do not have a completed cause of action.   

Introduction

In a judgment handed down by Justice Richards in the case of T&N Limited and Others1 on 16 June 2006, the English High Court granted leave to sanction a meeting of the creditors of T&N Limited and 57 associated companies to consider schemes of arrangement. The proposed schemes were to be made with claimants and potential claimants against the companies that either had, or might in the future have, claims for damages for personal injury arising out of asbestos exposure. The court considered:

  • whether a person who had been exposed to asbestos but who had not yet suffered an injury could be considered a contingent creditor; and
  • whether a company claiming a contribution in respect of a possible future claim against it by individuals who had been exposed to asbestos could be considered a contingent creditor. 

In 2005, Justice Richards had held that a completed cause of action was not required to be a contingent creditor in a scheme of arrangement.2 He now considered whether he would have decided the issue differently if he had been aware of Edwards v Attorney-General 3 . In that case, the New South Wales Court of Appeal held that possible future personal injury claimants who were not presently ill were not contingent creditors in a winding up, as they did not then have an accrued cause of action. Justice Richards concludes that this decision did not affect his analysis and that, in a scheme of arrangement, an accrued cause of action is not required to be a creditor.

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Background

T&N Limited and a number of associated companies had for many years engaged in the manufacture, distribution, sale and installation of products containing asbestos. Many of their employees had been exposed to asbestos in the course of their employment. Some developed injuries and others would do so in the future. Claims had been brought in the United States and the United Kingdom. T&N Limited and its associated companies reached a settlement with their insurers whereby £36.74 million was placed into escrow, and it was a term of the heads of agreement that schemes of arrangement be put into place to bind all current and future claims under the relevant insurance policies. 

The proposed schemes of arrangement sought to cover personal injury claims by employees, former employees, and their dependents for damages for asbestos-related injuries (whether or not the injury had yet occurred), and claims for contribution made by other companies. The £36.74 million would be made available to meet such claims. The court considered whether or not to convene creditors' meetings.

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The High Court decision: are future tort claimants contingent creditors in a scheme of arrangement?

Justice Richards affirmed his earlier decision in Re T&N Ltd.4  In that case he held that individuals who had been exposed to asbestos but had not developed an injury were 'creditors' under section 425 of the Companies Act 1985 . Although those individuals did not have an accrued cause of action in tort and could not be creditors in an English winding up, they were nevertheless contingent creditors in the proposed schemes of arrangement under s425 of the Companies Act. His reasoning was:

  • in the context of an English winding up, it was necessary at the time for a creditor to have an accrued cause of action.5 That was the result of certain provisions of the English Insolvency Rules requiring the existence of a 'debt', an 'obligation' and, in relation to tort claims, an 'accrued cause of action';
  • the term 'creditor' is not defined in s425 of the Companies Act which deals with schemes of arrangement;
  • the term 'creditor' for the purposes of schemes of arrangement under English law is broader than in the context of an English winding up and does not require the cause of action to have accrued. That is because:
    • the purpose of s425 of the Companies Act is to encourage agreements with creditors to avoid liquidation and facilitate the company's financial rehabilitation and that supports a broad construction of the term 'creditor'; and
    • there is Australian authority to the effect that the meaning of 'creditor' can differ between a winding up and a scheme of arrangement. In Re R. L. Child & Co Pty Ltd6 , Justice McLelland declined to introduce an exclusion on the meaning of 'creditors' in the winding up provisions into those provisions relating to a scheme of arrangement.  

In his 2005 decision, Justice Richards did not consider Edwards.7  In Edwards , the New South Wales Court of Appeal found that possible future tort claims by persons who had been exposed to asbestos, but were presently not ill, were not provable in a winding up. As they did not have a completed cause of action, they were held not to be contingent creditors. Justice Richards considered whether this case altered his earlier decision.

Justice Richards held that Edwards did not alter his view that future tort claimants who had been exposed to asbestos, but who had not yet suffered an injury, were contingent creditors for the purpose of schemes of arrangement. Justice Richards commented that he was not suggesting that the assumptions made in Edwards , which relate only to a winding up, were wrong as a matter of Australian law. He maintained his earlier distinction between who is a creditor for the purpose of a scheme of arrangement, and who is a creditor in a winding up.

 

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Is a claim for a contribution provable in a scheme of arrangement?

Justice Richards also considered whether a company seeking a contribution from one of the scheme companies in respect of a future claim by an employee who had been exposed to asbestos could be a contingent creditor. Having held that a person who had been exposed to asbestos could be a contingent creditor without an accrued cause of action, Justice Richards found no reason why a company with a claim for contribution as a result of that claim should not also be a contingent creditor.

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Surplus assets in a scheme of arrangement

In his 2005 decision in Re T&N Ltd8, Justice Richards had concluded that any surplus assets in a scheme of arrangement would be available to future tort claimants with non-provable claims, commenting that:

where all provable debts have been paid in full and there is a surplus otherwise available for shareholders, I can see no reason why the court would restrain a tort claimant from obtaining or executing judgment.

This issue had been decided differently in Edwards. In that case, the court held that if there was any surplus assets in the liquidation, these would be available to pay shareholders, and those people with future claims in tort (and who were therefore not contingent creditors) would have no claim against those assets. In his recent decision, Justice Richards commented:

I heard submissions to the same effect as a matter of English law, which I rejected for the reasons given in paragraphs 106-107 of my judgment. Again I see no reason to revise my conclusion or reasons on that issue.

 

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An arrangement of the creditors' rights against the companies or their insurers?

The proposed schemes were challenged on the basis that they were not a scheme of arrangement for the purposes of s425 of the Companies Act as it was the creditors' rights against the companies' insurers rather than against the companies that were the subject of the compromise. Justice Richards rejected this submission, holding that it is not a necessary element for an arrangement under s425 that it should alter the rights existing between the companies and the creditors with whom it is made. His reasoning included the following:

  • the word 'arrangement' has a very broad meaning;
  • the creditors' rights against the insurers were closely connected with their rights against the companies; and
  • the litigation settlement was in substance a tripartite matter, and the scheme of arrangement was an integral part of a single proposal affecting all parties.

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Amendment to the English legislation

In his 2005 decision, Justice Richards held that an accrued cause of action was required to be a contingent creditor in a winding up. That position has now changed as a result of The Insolvency (Amendment) Rules 2006. This amendment extends the definition of 'debt' to include tort claims where the basis of the claim existed at the time the company goes into administration, although the damage had not yet occurred. An accrued cause of action is therefore no longer required to be a contingent creditor in a winding up. 

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Impact of the findings

The main implications of the decision are that under English law:

  • a person can be a contingent creditor in a scheme of arrangement without an accrued cause of action;
  • a company seeking a contribution in respect of a claim that may be made against it may also be a contingent creditor in a scheme of arrangement and it is not necessary for the underlying cause of action to have first accrued for that to be so;
  • the definition of 'creditor' in a scheme of arrangement may be broader than in the context of a winding up;
  • in the event that there are surplus assets in a liquidation, future tort claimants who are not contingent creditors would be able to claim against those assets; and
  • a scheme of arrangement does not require the compromise of the creditors' rights as against the company.

As it is a judgment of the English High Court, the decision is of persuasive value only in Australia. The position in Australia may be different.

  • The finding that a person without an accrued cause of action could not be a contingent creditor in a winding up turned upon the interpretative sections of the relevant English legislation . There is no equivalent to those sections (which have now been amended) in the Australian legislation. Justice Richards considered a provision that is broadly similar to s553 of the Corporations Act 2001 [Cth] and indicated that, without those interpretative sections, there would be no basis for requiring a cause of action to have accrued to be a contingent creditor in a winding up. 
  • It remains to be seen whether the Australian courts would uphold the distinction between who is a creditor in a winding up and who is a creditor in a scheme of arrangement.  Likewise, as a result of the amendment to the insolvency rules, it may be the case that there is no longer any basis in English law for distinguishing between a creditor in a winding up and in a scheme of arrangement.

* Admitted only in England and Wales

Footnotes
  1. [2006] EWHC 1447 (Ch).
  2. [2005] EWHC 2870 (Ch).
  3. [2004] NSWCA 272 – see pp 63-65 Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law 2004.
  4. [2005] EWHC 2870 (Ch).
  5. This position has now changed as a result of an amendment to the legislation – see 'Amendment to the English legislation.'
  6. (1986) 4 ACLC 312.
  7. [2004] NSWCA 272.
  8. [2005] EWHC 2870 (Ch).

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