In the Matter of T&N Limited & Others v In the Matter of the Insolvency Act 1986 [2004] EWHC 2361 (Ch)

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
[2004] EWHC 2361 (Ch)Case No Case No: 5798 (and others) of 2001Venue Royal Courts of Justice, Strand,, London,, WC2A 2LL
Between
In the Matter of T&N Limited & OthersIn the Matter of the Insolvency Act 1986
Before
Mr Justice David Richards
[1]Mr Justice David Richards : This is an application for directions under section 14(3) of the Insolvency Act 1986 by the administrators of 133 English companies, including T&N Limited (T&N) and a large number of its subsidiaries. These companies are also subject to proceedings in the United States Bankruptcy Court for the District of Delaware (the US Court) under Chapter 11 of the US Bankruptcy Code. They are all members of a multi-national group whose ultimate holding company is Federal-Mogul Corporation Inc (FMC). FMC and 22 of its US subsidiaries are also subject to Chapter 11 proceedings. There is currently a Plan of Reorganisation (the Plan) being promoted in the Chapter 11 proceedings, which is designed to apply to all the US and UK companies. Voting on the Plan among the creditors is by ballot and the voting deadline is 3 November 2004. That is also the deadline for filing objections to the Plan with the US Court, which has scheduled the confirmation hearing for 9 December 2004. At that hearing the US Court will consider whether to confirm the Plan, which will include a consideration of the fairness of the Plan in accordance with the criteria under the relevant US law.[2]The administrators and a substantial body of creditors of T&N and its subsidiaries (the T&N Group) have grave reservations in relation to the Plan and it is in relation to issues connected with the Plan that the administrators now seek the directions of the court.[3]In one of his witness statements in support of this application, Mr James Gleave, one of the administrators, rightly said:
"This is a matter of utmost complexity. It is impossible to explain every issue and relevant fact in a witness statement of manageable proportions."
In order to understand the issues raised, and to provide a summary which can be used as and when further applications are made to this Court, it is necessary to set out a considerable amount of information and evidence. I wish to pay a real tribute to all the advocates who have appeared on this application and to the solicitors and clients, for the great assistance which they have given in their evidence and submissions and in seeking to make the many issues of fact and law as manageable as possible.[4]The structure which I propose to adopt is to set out some basic information about the companies and then, in more detail, to describe the principal creditor groups of the UK Companies and their claims. This will concern asbestos-related liabilities and pension fund deficits. I then give some detail of the administration and Chapter 11 proceedings, including a cross-border insolvency protocol and the development of the Plan. This is followed by a summary of the administrators' application for directions and its procedural history. Thereafter I consider the issues which arise on the application. In doing so, I give some explanation of aspects of UK insolvency law and procedures which may be relevant to these cases.[5]As well as the 133 English companies in administration there is one company registered in Scotland for which an administration order was made by the Court of Session in April 2002. I will refer to all these companies collectively as the UK Companies, but will normally refer to the English Courts and English law. However, it is highly unlikely that there is any material difference between English and Scots law on issues which arise for consideration. Background[6]T&N was incorporated in 1920 as Turner & Newall Limited, as the holding company for an amalgamated group of companies engaged in the manufacture of textile and insulating products. Many or all of these products contained asbestos, a natural product which was both light-weight and contained unique fire and heat-resistant properties. The T&N Group became a major UK business, expanding over the next 40 years into the manufacture, distribution and installation of a wide range of products containing asbestos, including building materials, as well as numerous other products having no association with asbestos. It also owned or controlled non-UK subsidiaries which owned or controlled asbestos mines in southern Africa and Canada. More recently, the group concentrated on car components, such as disc brake pads, spark plugs, pistons, piston rings and gaskets. T&N was for many years a listed company, with its shares traded on the London Stock Exchange. In 1998 it was taken over by FMC and has since remained a wholly-owned subsidiary of FMC. The UK business is now carried on by T&N and 13 other companies.[7]FMC was incorporated in the State of Michigan in 1899 and its shares are listed on the New York Stock Exchange. The Federal-Mogul group, comprising FMC and its worldwide subsidiaries and affiliates, is one of the world's largest automotive and vehicle parts manufacturers. It manufactures and distributes a wide range of products in the automotive, small engine, heavy-duty and industrial markets, supplying both manufacturers and so-called "aftermarket" customers such as distributors, engine rebuilders and retail parts stores. As at the end of 2003, the Federal-Mogul group, including the T&N Group, had approximately 44,900 full-time employees, of whom about 18,400 were employed in the United States and the majority of the remainder in Europe. There were about 3,500 employees in the UK. For the year 2003 the Federal-Mogul group had net sales from continuing operations of about $5.5 billion. There is a significant portion of the group's business which is conducted outside the US by companies which are not subject to Chapter 11 proceedings or any other insolvency-related proceedings. Asbestos litigation[8]The financial stability of US and UK companies in the FM group has been undermined by a rising tide of asbestos-related litigation. There have been, and continue to be, claims on a substantial scale in the UK from UK-based claimants, but, large as they are, they are dwarfed by the claims in the United States.[9]The majority of claims in the UK are brought by former employees against employers which processed or manufactured asbestos products in the UK. There was a total of 657 pending claims against T&N and its subsidiaries at the end of 2001, of which 427 were made by former employees. The next largest category, numbering 157, are so-called bystander claims by workers not employed by T&N companies but who worked at locations such as shipyards and power stations where they were exposed to asbestos through lagging and spraying carried out by employees of T&N companies. There were 43 household exposure claims where the claimant lived in the same household as an employee of a T&N company and the asbestos dust had been brought into the house on the employee's work clothes. There were also 18 product liability claims and 12 neighbourhood claims, the latter being claims by persons who lived or worked close to a T&N company factory.[10]A large proportion of the UK claims relate to serious and often fatal asbestos diseases. Of the claims pending at the end of 2001, 193 related to mesothelioma (an invariably fatal tumour affecting the pleura or peritoneum, which typically develops 20 to 40 years after the first exposure to asbestos and will usually be fatal within two years or less of diagnosis), about 25 related to other asbestos-induced cancer and 141 related to asbestosis (a non-malignant fibrotic condition of the lungs which causes breathlessness and in severe cases leads to an early death). While there is a declining trend of claims relating to asbestosis, particularly of severe cases, there is a rising trend in the incidence of mesothelioma in the UK which is expected to peak in the years 2011–2015.[11]The remaining 295 claims related to pleural conditions. These are very different from the claims described above. The condition usually takes the form of benign pleural plaques or thickening which cause no symptoms or disability. They indicate an exposure to asbestos and the possibility, but no more, that a serious asbestos-related condition may develop. Under English law pleural conditions have been held to be compensatable, normally by an award of provisional damages enabling the claimant to recover further damages if a serious condition develops. I was told by David Allan QC, appearing for representative UK asbestos claimants, that the existing position that such conditions can ground a claim for damages is to be challenged in a case to be heard later this year.[12]In studies undertaken by Dr Mark Peterson, an actuary instructed to advise the Asbestos Claimants Committee in the United States, he has estimated that there are likely to be 21,125 future UK claims: Table 1.7 of his memorandum dated 19 February 2004. Based on settlement values during the period 1998–2001 and assuming a 2.5% future inflation rate and a 5.5% discount rate, Dr Peterson has estimated the present value of forecasted claims filed after 2001 at £205 million or £217 million, on different assumptions, the latter broken down to mesothelioma (£122 million), other cancers (£8 million), asbestosis (£52 million) and pleural conditions (£36 million): Table 1.8. He estimated the value of claims pending at the end of 2001 at £14.7 million.[13]With the exception of the pleural claims, the principles applicable to UK asbestos claims are settled and there is generally no dispute on liability and the quantum of the damages can be agreed without undue difficulty. This has been of great importance because as the figures above demonstrate many of the claimants are suffering from serious and often fatal conditions, and compensation can be paid while it is still of some use. It should also be noted that although in some cases legal responsibility for the claimant's condition may be shared with others, the relevant T&N company will often be the only defendant which manufactured asbestos products.[14]Claims in the United States have been brought principally against T&N, two US subsidiaries of T&N (GHI and Ferodo), FMC and two subsidiaries unconnected with T&N. As at 1 October 2001, 114,443 personal injury claims were pending against T&N. The great majority of these claims are product liability claims for personal injuries, some being based on conspiracy theories of liability. In addition, there are a limited number of property damage claims against T&N.[15]The claims against T&N arise primarily out of three areas of business activity. The first was the manufacture of sprayed Limpet asbestos. It was produced in England and sold and applied by locally-appointed licensees throughout the world. There were three successive licensees for the United States between 1934 and 1973, two based in the United States and the third in Canada. Limpet was not widely marketed in the US. Secondly, claims are made against T&N by reason of its ownership from 1934 to 1962 of Keasbey & Mattison Co (Keasbey), a Pennsylvanian company which built up an asbestos-product manufacturing business before its acquisition by T&N. Claims based on theories that T&N was the legal alter ego of Keasbey have almost always been unsuccessful, but claims have been made on a number of other bases. The only appellate court to consider such claims, a California state court applying California law, upheld a jury verdict based on a finding that T&N was responsible for Keasbey's pipe and boiler insulation products, because it was a bulk supplier of raw asbestos fibre for use in those products. The third basis for claims arises out of the brokerage activities of a T&N subsidiary (TAF) which arranged the sale of surplus raw asbestos fibre from mine-owning subsidiaries in southern Africa to independent third party buyers. TAF never took physical possession or custody of the fibre nor was it responsible for its packaging or transportation. Only a tiny fraction of all the asbestos fibre which reached the United States was brokered by TAF. Its total brokerage over 45 years amounted to 400,000 tons whereas from the early 1950's to the early 1970's nearly 1 million tons of new fibre were used annually in the United States.[16]There are a number of features of US asbestos litigation which distinguish it from litigation in the UK. First, although a material number of claimants suffer from serious and in some cases fatal conditions, they represent only a small proportion of the asbestos-related claims against T&N. The remaining claimants (described as non-malignant non-impaired, or NMNI) are not presently ill as a result of asbestos exposure, but assert compensatable claims. Secondly, claims are typically brought against a large number of defendants, including many product manufacturers and asbestos suppliers. Thirdly, many of the cases are tried and damages awarded by juries. Fourthly, the combination of class action rules and contingency fees greatly expands the number of small claims. In a witness statement made by James Zamoyski, senior vice president and general legal counsel of FMC, in support of the application in October 2001 for administration orders in respect of T&N and its subsidiaries, he stated:
"In the past 20 months, five major publicly traded companies have filed for Chapter 11 protection because of the overwhelming burden of asbestos litigation. These include GAF, Armstrong, USG, Grace and Owens Corning. The US courts have been unable to cope on a case-by-case basis. Consolidation of claims has led to indiscriminate grouping of NMNI claimants with the impaired. The NMNI claimants have succeeded in obtaining large jury verdicts. This has only served to fuel the problem further, with overwhelming demands for settlement now being made without regard to traditional notions of liability or damages. The net is being cast ever wider to find potential defendants on the periphery of any direct involvement with asbestos who still have assets available to meet the demands. For example, a class of civil conspiracy claims has developed in an attempt to overcome the normal requirements to show causation as a result of actual or secondary exposure to a product for which the defendant is responsible. The overall problem of the massive increase in asbestos-related litigation and the manner in which claims are now being brought and targeted is one which the US Congress, independently and at the urging of the United States Supreme Court, has attempted without any success to address with various different bills coming before it in the 1980s and throughout the 1990s. In 1998, asbestos payments made by the FM Group totalled $89 million all of which related to T&N liabilities. These payments increased to $178 million in 1999 and $351 million in 2000, of which 93% and 92% respectively were attributable to T&N even though, as a practical matter, there has been virtually no exposure to any T&N asbestos product in the US since the mid-1960s. To illustrate the point I make in paragraphs 20 and 21 above, I can say that there are now thousands of claims now brought against T&N in the US which are entirely unrelated to any direct exposure to T&N product."
[17]As at 31 December 2001 there were 134,235 claims pending against T&N and in his analysis Dr Peterson has allocated the claims among different categories of condition: Table 2.4. A total of 9,973 are allocated by him to mesothelioma, lung cancer and other cancers, and 4,487 are unknown. The remaining 119,776 claims are allocated to "non-malignant". Available records did not enable him to break this category down between asbestosis and pleural conditions. However, it would seem highly likely that the great majority are pleural conditions, displaying no adverse symptoms, illness or disability.[18]Dr Peterson has also undertaken work with a view to estimating the number of claims likely to be made in the future and the present values of the liabilities arising from those claims. His analysis in these areas is a matter of great controversy so far as the administrators and some groups of creditors of the T&N companies are concerned. Following his standard forecasting methods and using T&N claim filings during 2000 and 2001 as the base period, he forecasts that 730,700 future claims will be filed against T&N, assuming that propensities to sue do not increase over their levels of 2000 and 2001: Table 2.7. However, his analysis shows steady increases in propensities to sue T&N, leading him to prefer an assumption that those increases will continue over five years. This produces an estimate of 1,160,880 future claims, of which 1,081,660 are allocated to the non-malignant category. The administrators and some creditor groups take issue with this assumption.[19]Even more controversial in the eyes of the administrators and creditor groups represented before me are Dr Peterson's estimates of the cost to T&N of pending and future claims. Based on the average resolution cost within each disease during the years to 1998 to 2001, his estimate of the cost of pending claims is $565 million. On the same basis, but building in certain assumptions for increases in resolution costs, his estimate of the present cost of future claims is $5.728 billion. However, Dr Peterson expresses misgivings about basing his analysis on resolution costs between 1998 and 2001 which he considers to be too low for the purpose of estimating the costs of pending and future claims. On page 15 of a memorandum dated 19 February 2004 he explains:
"Our use of T&N's historic resolution costs places conservatively low values on its liabilities for pending claims. As we did in October 2002, we use T&N's resolutions over the multi-year period 1998-2001 as the basis for valuing pending claims even though T&N's average costs to resolve claims had increased over this period. It is unlikely that T&N would have been able to continue to resolve its asbestos liabilities for the amounts that it paid as a CCR member. T&N would have had to pay considerably more on average to resolve claims in the future both because it lost the negotiating and tactical advantages that it had as a CCR member and also because it would have faced sharply increased demands and settlement expectations as other asbestos defendants entered bankruptcy in 2000 and 2001. These changes would have been particularly sharp for T&N because of its history in manufacturing and selling many and particularly dangerous asbestos products. Even CCR members who did not have the burden of T&N's particular history saw their settlement values increase by multiples in the early 2000s after leaving CCR. T&N would likely have had to pay even greater increases."
The Center for Claims Resolution (CCR) was a body formed in 1988 by defendants in asbestos litigation, including T&N, as an agent to administer, negotiate and settle all asbestos-related personal injury and wrongful death claims brought against its members. T&N's membership terminated in October 2001.[20]In preparing the trust distribution procedures for the asbestos trust to be created as part of the Plan, to which I refer in greater detail below, substantially increased claims resolution costs are assumed than those used by Dr Peterson to prepare the estimates mentioned above. Echoing points made in the passage cited above, he states at page 18 of his memorandum:
"We forecast T&N's liability under the current terms of the TDP that will be administered by the Federal-Mogul Trust. This TDP specifies conditions that claimants must satisfy to receive payment. These requirements will result in disallowance of many claims, far more than the percent of claims that were closed without payment by T&N prior to its bankruptcy. The TDP also provides claim values that exceed the historic average settlement amounts paid by T&N as a CCR member. These increases reflect the greater quality of claims that will be paid under the TDP, claims that meet the more rigorous claims requirements of the TDP. The TDP values also attempt in part to reflect the greater amounts that T&N would have had to pay as of the date of its bankruptcy filing, both because the company no longer had the advantages and protections of CCR membership and also because plaintiffs would have looked to T&N for far higher payments as a highly culpable defendant remaining after bankruptcy proceedings removed most other major asbestos defendants."
(emphasis added) Applying the TDP claim values to his preferred estimate of 1,160,880 future claims, and to the pending claims, Dr Peterson estimates the present value of total liability for US claims at $10.497 billion: Table 3.2.[21]The administrators and the creditor groups represented before me consider these estimates to be grossly inflated. The administrators commissioned EMB Consultancy LLP (EMB), consultant actuaries, to undertake a review and appraisal of Dr Peterson's estimates and related matters. Although there was direct contact with Dr Peterson and some information requested by EMB was supplied, there remained a number of outstanding questions and requests for further information, and EMB acknowledge that his responses could significantly affect their view.[22]EMB take issue with the projected increase in the number of future US claims based on an increasing propensity to sue and with the TDP values for claims. Their estimate of the present value of pending and future US claims is in the region of $5.3 billion. They have particular concerns as to the method by which the TDP values have been established. As appears from the passage from page 18 of Dr Peterson's memorandum cited above, the TDP claim values would seem to have been agreed by the Plan Proponents and provided to Dr Peterson. EMB comment at para 2.1.10 of their report:
"The above points lead us to believe that the US TDP values for T&N are overstated. However, we have seen insufficient information to allow us to form a view on the extent to which they may be overstated. In our opinion, the starting point for the TDP values has to be the recent historical experience. However, we acknowledge that the introduction of strict TDP medical criteria and the notional settlement of claims through the tort system rather than the CCR facility will increase the average settlement value of claims. At the same time we note that this is not the basis on which the TDP purports to establish the TDP values, nor the basis on which the UK TDP values have been determined. In any event, we have not seen sufficient evidence to justify the significant increases suggested by Dr Peterson. For the purposes of arriving at an illustrative valuation we have selected a value mid-way between the historical average claims and the TDP value. However, there is of course, a wide range of possible results and there remains significant uncertainty regarding the best estimate value of T&N's US asbestos related liabilities."
(emphasis added)[23]As regards the UK asbestos claims, EMB express themselves to be generally comfortable with Dr Peterson's projections of future claim numbers, but their present best estimate of the value of future liabilities is in the region of £183 million, as against the figure of £252 million estimated by Dr Peterson. However, they caution that there are many approximations and assumptions that they have been forced to make and until they can see and understand the transition matrix used by Dr Peterson they cannot determine whether their estimated liability of £183 million represents a sound best estimate.[24]The trustees of the T&N pension scheme have commissioned a separate analysis of Dr Peterson's estimates from Michael Angelina, consulting actuary with the Tillinghurst business of Towers Perrin. He sounds a pertinent note of caution about any estimates of future liabilities of this sort:
"There is an inherent uncertainty in any actuarial estimates of asbestos liabilities. Projections of mass tort liabilities, such as asbestos, are subject to much greater uncertainty than would normally be associated with a review of general liability exposures other than mass torts. The technological, judicial and political climate for mass torts is changing and future events relating to asbestos litigation are extremely uncertain. Liabilities for claims are subject to the outcome of events yet to occur, e.g. the likelihood of claimants bringing claims, the size of jury awards, changes in the standards of liability, and the attitudes of claimants towards settlements of their claims. I have employed techniques and assumptions that, in my judgment, are appropriate, and the conclusions presented herein are reasonable, given the information currently available. However, it should be recognized that future patterns of claims and awards may deviate, perhaps materially, from my estimates."
Mr Angelina's best estimate of future US asbestos liabilities is in a range of $2.1–$5.5 billion. He takes particular issue with the TDP values and the assumption that payments in the United States for mesothelioma and lung cancer will continue to rise at the same rate as observed during the period 1997–2001. As regards UK claims, his estimate is £216.7 million which he considers to be consistent with Dr Peterson's estimate of £252 million.[25]As will appear later, the proper estimate of US asbestos liabilities is a major element in some of the principal concerns of the administrators and creditor groups appearing on this application. T&N pension scheme[26]There is a substantial deficit in the T&N pension scheme, which would be the largest single claim in a winding-up of T&N. The pension scheme, now called the T&N Retirement Benefits Scheme (1989), was originally established in 1975. It is a defined benefit scheme providing benefits of a final salary type. Following the administration order, Alexander Forbes Trustee Services Limited was appointed as independent trustee to the scheme under section 23 of the Pensions Act 1995, in addition to T&N Pensions Trustee Limited.[27]T&N is the principal employer, and now the only participating employer, under the scheme. Until July 2004, 13 subsidiaries of T&N were also participating employers but, following an application by the administrators to me for directions, they gave notice of termination of participation in accordance with the rules governing the scheme. The scheme has about 37,000 beneficiaries, comprising (in round numbers) 100 employees of T&N, 20,400 pensioners receiving benefit, and 16,700 deferred members, not currently receiving benefit but entitled to do so in the future.[28]The scheme, in common with many pension schemes, showed an actuarial surplus on an ongoing basis for the greater part of the 1990's. The position is now very different. There are various criteria by which a pension scheme deficit can be judged. The "minimum funding requirement" (MFR), introduced by sections 56–61 of the Pensions Act 1995, is a statutory requirement for schemes such as the T&N scheme, to maintain a minimum level of assets relative to liabilities, in each case valued on a basis prescribed pursuant to the statute. Schemes must be the subject of an actuarial valuation every three years and if the relevant level is shown to be less than 100% of MFR but more than 90%, the employer must restore it to at least 100% by contributions in accordance with a schedule agreed between employer and trustee or, in default of agreement, fixed by the trustee. Other provisions apply if the relevant level is shown to be less than 90%. MFR is, however, a minimum level and, under current market conditions, it is less than actuaries would advise scheme trustees and employers to maintain in order to meet the continuing funding requirements of schemes. The preliminary results of the latest triennial valuation of the T&N scheme, as at 31 March 2004, shows that the MFR level has fallen to 91%, representing a deficit of £97 million.[29]The scheme could be valued on an ongoing basis, but this assumes that T&N would make contributions to make good the past service deficit. Although contributions were resumed with effect from December 2002 to cover the cost of accruals since October 2001, no contributions have been made since the administration order to make good the past service deficit and there is little or no prospect of such contributions in the future. This basis of valuation therefore appears irrelevant and accordingly no such valuation has been prepared.[30]The alternative basis of valuation arises if the scheme is terminated. In that event, the trustees would have a claim against T&N for the amount of the deficit by reference to the cost of securing members' benefits through the purchase of annuity policies. This claim arises under clause 32(10) of the Scheme Rules and might in certain circumstances also arise under section 75 of the Pensions Act 1995. This liability is estimated as at 31 March 2004 to be £917 million. As an alternative, the trustees have the option to run the scheme on a closed fund basis, paying benefits as they fall due. The preliminary calculation on this basis shows a deficit of £662 million.[31]The trustees have claims against subsidiaries of T&N and one joint venture company which have ceased to be participating employers, mostly in July 2004. The claims, which arise under section 75 of the Pensions Act 1995, are calculated on the MFR basis as at the date immediately before participation ceased. These claims are estimated to amount in total to approximately £80 million. The existence of these separate claims is important because at least some of the relevant companies have significant assets and may have only a modest level of liabilities, thereby bearing directly on a comparison of the trustees' likely level of recovery under the Plan as against an orderly realisation of assets followed by a distribution among creditors of the companies concerned. Champion pension scheme[32]The Champion pension scheme is a separate scheme for employees and former employees of Federal-Mogul Ignition (UK) Limited (FMI), successor to the business of Champion Sparking Plug Company Limited. FMI is part of FMC's UK group, but is not a subsidiary of T&N. The scheme was established in 1947 and is now governed by a Definitive Deed and Rules dated 30 December 1991 as subsequently amended. The trustees are Champion Pensions Limited and Ann Hearn, who was appointed as independent trustee following the making of the administration order for FMI. As at 30 June 2004 it had a total of 1,156 members, comprising 295 active members, 436 deferred members and 425 pensioner members. At 30 June 2004 the market value of the scheme's assets was £44.6 million and the estimated cost of buying-out members' benefits by the purchase of annuities was approximately £86 million, giving a deficit on the buy-out basis of £41.4 million. Following further advice, Mrs Hearn has formed the opinion that a sum of £43.9 million is now required in order to enable the benefits payable under the scheme to be maintained.[33]There is an important difference between the rules of the Champion scheme and those of the T&N scheme. Under the former, the trustees are entitled at any time to demand payment of such sum as they consider necessary to enable the benefits of the scheme to be maintained and they have accordingly made a written demand for £43.9 million to FMI. It is an immediately payable debt.[34]Just as the claims of the T&N scheme trustees against former participating employers require separate consideration, so the claim of the Champion scheme trustees against FMI requires consideration in the light of the assets and liabilities of that company. Only two asbestos claims have been made against it. Commencement of Chapter 11 and administration proceedings[35]As already mentioned, it was a result of the rising tide of asbestos claims in the United States that on 1 October 2001 applications were made both in the United States and England. FMC and 22 subsidiaries in the United States, and T&N and 132 other English companies, filed voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code. These English companies applied to the High Court for administration orders under the Insolvency Act 1986. Administration orders were made and the present administrators were appointed.[36]A significant difference between Chapter 11 proceedings and administration proceedings is that in the former control normally remains with the existing management, whereas an administration order directs that, during the period for which the order is in force, the affairs, business and property shall be managed by a person (the administrator) appointed for the purpose by the court: section 8(2) of the Insolvency Act 1986. Only licensed insolvency practitioners are eligible for appointment as administrators. The administrators are required by section 17 of the Insolvency Act 1986 to take into their custody or under their control all the property to which the company is or appears to be entitled and to manage the affairs, business and property of the company. For these purposes wide powers are conferred on the administrators by section 14(1), and by section 14(2) they are empowered to remove and appoint directors. By section 14(4), they may consent to the continued exercise by directors of their powers, either generally or in relation to particular cases.[37]For purposes including the provision of a viable management structure for the English companies, which received their strategic management from the United States and their product line management from Europe and which had no UK-resident directors, the administrators and all the US and English companies in the Chapter 11 proceedings entered into a Cross-Border Insolvency Protocol (the Protocol). The Protocol provides that it was to become effective only upon its approval by the US Court and the High Court. The High Court gave its approval on 1 October 2001 and the US Court gave its interim approval on 4 October 2001 and its final approval on 14 January 2002. In the light of later developments it is worth reading the purposes of the Protocol as expressed in Recital 1.4 "The Parties wish to enter into this protocol in[38]Clause 3.1 sets out an express agreement to cooperate, while acknowledging the overriding powers of the two courts:
"The Parties agree subject to orders and directions of their respective Courts: (a) to co-operate with each other in connection with any actions taken in the US Court and/or the English Court; (b) where appropriate, to take such other steps as may be necessary to co-ordinate the administration of the US Cases and the Cross-Border Cases for the benefit of the Debtors' respective estates."
[39]So far as management of the business is concerned, clause 3.3 contains the administrators' general consent pursuant to section 14(4) of the Insolvency Act 1986 to the continued exercise by the directors of the UK Companies of all their powers, subject to the supervision and control of the administrators as set out in the Protocol and to reservations set out in clause 3.4, and subject also to the administrators' power to revoke or vary the consent. Included in the reserved matters set out in clause 3.4 is the acquisition, sale or disposal of any asset outside the ordinary course of business and agreeing the validity or amount of claims of any pre-petition creditor or their payment out of the assets of the UK Companies.[40]The Protocol also contains important provisions designed to promote cross-border cooperation between the courts. Clause 5 provides as follows (the reference to "Cross Border Cases" being to the administration of the UK Companies):
"5.1 The Parties acknowledge that nothing in this Protocol shall divest the US Court's independent jurisdiction over the subject matter of the US Cases and the English Court's independent jurisdiction over the subject matter of the Cross-Border Cases. 5.2 It is intended that, insofar as practicable: (a) the US Court shall have sole and exclusive jurisdiction and power over the conduct of the US Cases; and (b) the English Court shall have sole and exclusive jurisdiction and power over the conduct of the Cross-Border Cases. 5.3 Nothing in this Protocol shall be construed as releasing any Party from his general obligation to respect and comply with the independent, non-delegable duties imposed upon them by the Bankruptcy Code or English Insolvency Law or any other applicable laws as the case may be."
Clause 9 provides:
"9.1 In the event of any disputes arising between any of the Parties, they shall (a) make all reasonable attempts to reach agreement; and (b) where agreement cannot be reached: (i) a dispute relating principally to matters affecting the Cross-Border Cases shall be referred to the English Court; (ii) a dispute relating to matters affecting principally the US Cases shall be referred to the US Court; and (iii) a dispute affecting substantially both the US Cases and the Cross-Border Cases shall be referred to whichever one of the courts appears best suited to determine the issues in dispute. 9.2 Where a dispute has been referred to one or both of the Courts for resolution, the Parties agree that the Court shall be asked to have regard to this Protocol and to give the fullest effect to the principles of comity and the objectives set out in Paragraph 1.4 above."
Clause 12.1 provides:
"In respect to any matters before the US Court or the English Court, the Parties shall request that the respective Court, where appropriate and feasible to do so, co-ordinate activities with, and respect the judgments of, the other Court."
[41]A central feature of the Protocol is that it makes provision for the preparation of a Reorganisation Plan for all the US and UK companies. The purpose of Chapter 11 proceedings is to enable a plan of reorganisation to be developed with a view to the survival of the companies and their businesses. In clause 3.2 the administrators acknowledged that the officers and directors of the US companies were best positioned to develop a Plan and to deal with all asbestos litigation and that they should have primary responsibility for, amongst other things, "(a) developing, in consultation with the Administrators in so far as it relates to the Cross-Border Companies, an integrated Reorganisation Plan and confirming and implementing a Reorganisation Plan; (b) conducting, in consultation with the Administrators in so far as they relate to the Cross-Border Companies, any and all Proceedings Involving Asbestos (including, without limitation, any proceedings to establish standards that will be applied to claims or litigation that has been or may be filed against any of the Debtors or to estimate the liabilities of any of the Debtors);"[42]The Chapter 11 process provides the debtor company with temporary relief from its creditors while a plan is formulated and promoted. Immediately upon filing a Chapter 11 petition, a statutory injunction barring actions against the debtor company arises by operation of law and without the need for an order of the court. Although the debtor has the exclusive right to file a Plan during the period of 120 days after the filing of the petition and thereafter to seek creditor approval during the following period of 180 days, both periods being capable of extension or abridgement by the court, one or more "parties-in-interest" may do so once these exclusive periods have lapsed, as they have in this case. In conjunction with the preparation of a plan, a disclosure statement must be prepared by the plan proponents. The disclosure statement must be approved by the US Court before any votes can be solicited on the plan. The disclosure statement must contain information of a kind, and in sufficient detail, to enable as far as reasonably practicable a hypothetical reasonable investor, typical of the relevant creditors and other parties-in-interest, to make an informed judgment on the plan. Once approved, the disclosure statement is sent to all affected or "impaired" creditors and other parties-in-interest, or their representatives if the court so directs, with voting forms. The court will establish the voting procedures, with a final date for the receipt of votes. For acceptance of the plan by a class of impaired creditors, it must be approved by a vote of at least two-thirds in dollar amount of claims and more than one-half in number of the voting creditors. The plan is subject to confirmation by the court which will consider a range of issues in deciding whether it is appropriate to confirm the plan. The court may, subject to the satisfaction of certain conditions, make the plan binding on a class of creditors even though it was not approved by the necessary majority of that class.[43]The administration orders were sought in England and Scotland in order to obtain the protection provided by such orders, with a view to the promotion of company voluntary arrangements under Part I the Insolvency Act 1986 or schemes of arrangement under section 425 of the Companies Act 1985, so as to give effect to the Plan as regards the creditors of the UK Companies. The administration orders were required to specify one or more of the purposes set out in section 8(3) of the Insolvency Act 1986 and, consistently with the aim stated above, the purposes of the orders were the survival of the companies, and the whole or any part of their undertakings, as going concerns, the approval of voluntary arrangements and the sanctioning of schemes of arrangement. At that time only the order for FMI also included the other purpose specified in section 8(3), a more advantageous realisation of the company's assets than would be effected on a winding-up.[44]In accordance with normal procedures, the Office of the United States Trustee appointed a number of official committees to represent various classes of parties-in-interest. Members of these committees owe fiduciary duties to the creditors within the committee's constituency and, as such, must act in the best interests of those creditors. Among each committee's responsibilities is to examine all matters relevant to the formulation of the reorganisation plan. An official committee of unsecured creditors was appointed, comprising exclusively or principally holders of Notes issued pursuant to indentures made in 1994, 1998 and 1999. The total amount due is approximately $2.2 billion. They were issued by FMC and are guaranteed by various US subsidiaries and by one of the English companies in administration, F-M UK Holdings Limited. No other UK company has any liability in respect of the Notes. There was also appointed an Official Committee of Asbestos Claimants comprising eight US claimants and one UK claimant. Other Official Committees of equity security holders and asbestos property damage claimants were appointed at later dates. Development of the Plan[45]Central to the development of the Plan has been a solution to the problem of US asbestos claims. A mechanism is provided under section 524(g) of the US Bankruptcy Code for the creation of an asbestos trust as part of a plan of reorganisation. Section 524(g) was enacted specifically to deal with asbestos-related liabilities. The court has to be satisfied that in addition to present claims the company is likely to be subject to substantial future asbestos-related claims, that the amounts, numbers and timing of future claims cannot be determined, that pursuit of future claims outside the Plan procedures is likely to threaten the Plan's purpose to deal equitably with present and future claims, and that the trust provides for mechanisms to pay present and future claimants in substantially the same manner. The essential features of the trust are that: i. it must assume the asbestos-related liabilities of the debtor company; ii. it must be funded in whole or in part by the securities of one or more debtor companies involved in the Plan and by the obligation of such debtor or debtors to make future payments, including dividends; iii. it must own, or be entitled in specified circumstances to own, a majority of the debtor, its parent corporation or any debtor subsidiary; and iv. it must use its assets or income to pay asbestos-related claims and demands. The Plan must be approved by the class or classes of claimants whose claims are to be assumed by the trust, the required majority being 75% of claimants voting on the Plan. If confirmed, the plan and any injunctions made to supplement it will require all present and future asbestos-related claims and demands to be made against the trust and not against the debtor companies or third parties within certain categories.[46]The basis for the Plan was an agreement reached early in the Chapter 11 process between the Official Committees of Unsecured Creditors and Asbestos Claimants, whereby: i. the Asbestos Trust would, on implementation of the Plan, receive 50.1% of the common stock of the reorganised FMC; and ii. the Noteholders would in settlement of their claims receive the remaining 49.9% of the common stock of FMC, and would be entitled to appoint a majority of the directors. This remains the central feature of the Plan and, for reasons which will appear, drives the payments to be made to other creditors.[47]The management of the debtor companies lost their exclusive right to file a plan by an order of the US Court made on 1 October 2003. The background set out in the administrator's evidence is that the management had put forward proposals to bring in a new investor on terms inconsistent with the terms of the plan previously developed, without it appears prior consultation with US creditor groups. Those groups were strongly opposed to the new proposals and the US Court dismissed the management's application for orders to enable them to develop the new proposals.[48]The Proponents of the Plan, as it is now presented, are the Official Committees of Unsecured Creditors, Asbestos Claimants and Equity Holders, the Future Claims Representative (appointed under section 524(g) to protect the rights of future asbestos claimants), an agent for the holders of Bank Claims against FMC, other US companies and one UK Company, and the US and UK debtor companies themselves acting by their directors. The Plan[49]The Plan is a complex set of proposals, with a wide variety of different treatments proposed for different groups of creditors. It will be necessary to examine for the purposes of this application some of its provisions in some detail.[50]The foundation of the Plan remains as I have described above, with present and future asbestos claims lying exclusively against the Asbestos Trust which will own 50.1% of the common stock of FMC, and the claims of Noteholders being compromised by a release in exchange for the issue to them or for their benefit of 49.9% of the common stock of FMC, with the right to appoint a majority of directors and thereby control the management of the group.[51]The valuation of the common stock of the reorganised FMC is critical for determining the returns to the Asbestos Claimants and the Noteholders, which in turn drive the returns under the Plan to other groups of creditors. This stems from the provisions in Chapter 11 which sets out the criteria for confirmation of a plan. If the plan does not receive the affirmative vote of all classes, it may still be confirmed by the court through a procedure known as "cramdown". At least one independent class of creditors must have voted in favour of the plan by the necessary majority and the court must be satisfied, with respect to each non-accepting class, that "the plan does not discriminate unfairly, and is fair and equitable." A plan will discriminate unfairly unless it treats identically all creditors who are in a similar position. Accordingly, if one class of unsecured creditors of company A are to receive a return of 35%, any other class of unsecured creditor of that company must do likewise.[52]The value of the common stock is stated in the disclosure statement at between $1.8 and $2.2 billion. For the Noteholders this represents an estimated recovery, as stated in the disclosure statement, of 38–47% (prior to enforcement of the subordination provisions relating to the Convertible Subordinated Debentures) or 42-51% after enforcement of the subordination provisions. In order to ensure that the Plan does not discriminate unfairly as regards any other class of unsecured creditor of the companies liable in respect of the Notes, the Plan provides for a cash return of 35% on their claims payable in cash.[53]The value of common stock to be held by the Asbestos Trust is much the same as that to be issued for the benefit of the Noteholders. 79% of such stock will be held in a sub-fund for the benefit of asbestos claimants against T&N and other UK companies. Because of the huge potential values of the asbestos liabilities the percentage recovery is very much less than will be received by the Noteholders or other creditors of the companies liable in respect of the Notes. On the basis of Dr Peterson's estimates, which are used in the Plan, it results in an estimated recovery of 7.2%. It is that percentage recovery which is then made available as the best rate of recovery under the Plan to other unsecured creditors of T&N and some other UK companies. Provided that the Asbestos Claimants approve the Plan, the other unsecured creditors can be bound if they are treated on an identical basis to the Asbestos Claimants. Although the proposals put to the trustees of the T&N pension scheme are more complex, their default position under the Plan is likewise a recovery of 7.2% or less.[54]I will consider in more detail below various provisions of the Plan, particularly as they relate to the position of the UK pension trustees and the provisions which the Plan Proponents have inserted in an effort to deal with the consequences for the UK Companies if there are no voluntary arrangements or schemes of arrangements. Administrators' application for directions[55]The application for directions under section 14(3) of the Insolvency Act 1986 was issued on 24 May 2004 and was prompted by the concerns of the administrators and some creditors of the UK Companies as to the terms of the Plan and its compatibility with English insolvency law. The disclosure statement had been approved by the US Court at a hearing on 4 June 2004. As with an application under section 425(1) of the Companies Act 1985 to convene meetings of creditors and members to consider a proposed scheme of arrangement, at which stage the court approves the form of explanatory statement required by section 426, the US Court was not on 4 June 2004 concerned with the merits or fairness of the Plan but with whether the disclosure statement was in a form, and contained the information, required to enable creditors to vote on the Plan. The administrators had objections to aspects of the disclosure statement but on the Plan Proponent's agreement to make certain amendments, the objections were withdrawn.[56]As I have already mentioned, the Plan envisages that company voluntary arrangements (CVAs) or schemes of arrangement would be promoted in England to give effect to the Plan as regards the English companies and their creditors. As a legal and practical matter, it is the administrators' submission that CVAs or schemes of arrangement are essential to ensure the Plan's enforceability in the UK. As administrators, they are the only people who have standing to propose CVAs or schemes: section 1 of the Insolvency Act 1986 and section 425(1) of the Companies Act 1985. Their principal concern then as now is that they cannot properly propose CVAs or schemes, for two fundamental reasons: i. The Plan is fundamentally unfair in its treatment of the creditors of the UK Companies. ii. Creditors of the English companies are likely to achieve a better result from a controlled realisation of the businesses and assets of those companies and a distribution of the realisation proceeds among the creditors, than under the Plan.[57]In his witness statement in support of the application, Mr James Gleave, one of the joint administrators, explained that there had been discussions with the Plan Proponents on these issues but without any resolution. The administrators were therefore in a difficult position. On the one hand, the purpose of the administration orders had been to enable the development of a Plan under Chapter 11 which could be implemented in the UK through CVAs and schemes. A Plan had been developed and it was strongly supported by the Committee of Asbestos Claimants who represent on any footing a large number of claimants against the English companies with claims estimated at very large sums. On the other hand, it had equally been envisaged that the Plan would be developed on a consensual basis with the administrators so as to be in a form which they could recommend and take steps to implement in the UK. As it was, they had fundamental concerns about the terms of the Plan which were shared by the principal UK creditors, that is the trustees of the pension funds and the UK Asbestos Claimants. Those concerns are also shared by the Official Committee of Asbestos Property Damage Claimants who are largely or exclusively US creditors and were represented at the hearing before me.[58]By their application, the administrators sought directions as to whether they should take steps to propose CVAs or schemes of arrangement. They also sought an order that, if they were not directed to do so, the purposes specified in the administration orders be varied pursuant to section 18(1) of the Insolvency Act 1986 to include, as an additional purpose, a more advantageous realisation of the companies' assets than would be effected on a winding-up of the companies.[59]At a hearing on 27 May 2004, at which a number of US parties (the Official Committees of Unsecured Creditors and of Asbestos Claimants, the Debtor companies and the agent for the holders of Bank Claims) were represented, as well as the administrators and the trustees of the T&N pension scheme, various procedural directions were made with a view to a full contested hearing. The two Official Committees and the trustees of the T&N pension scheme were given permission to appear at the full hearing and to serve evidence, as were named individuals as representatives of the UK Asbestos Claimants. A pre-emptive costs order was made in favour of those representatives, without which the UK Asbestos Claimants could not as a practical matter have participated.[60]A hearing was fixed for July, but discussions resumed between the administrators and the Plan Proponents in mid-June. In a witness statement dated 13 July 2004, Mr Gleave explained his understanding of the position. The Plan Proponents were not prepared to agree any revisions of the Plan and were proceeding with the mailing of the disclosure statement. The Plan Proponents appeared to accept that, in the light of the administrators' concerns, they would not promote CVAs or schemes of arrangement and could not, as a general proposition, be required to do so. It seemed to be common ground that the only way forward for the UK Companies was a controlled realisation of assets and distribution to creditors, although there was no formal written statement to that effect. Discussions had concentrated on the realisation process and how, if at all, it might be integrated with the Plan. It was however a very difficult issue as the Plan was substantially inconsistent with UK insolvency law and practice.[61]On 16 July 2004, Mr Justice Lindsay made an order at the request of the administrators, with the agreement of the Plan Proponents. Each of the administration orders were varied so as to specify, as an additional purpose, a more advantageous realisation of the company's assets than would be effected on a winding-up, except in the case of three companies where that purpose was already stated. The balance of the application was adjourned generally with liberty to restore on 21 days' notice. The adjournment was agreed on the basis of a formal acknowledgement by the Plan Proponents in a letter from their English solicitors that the administrators could not be required by the Plan Proponents to promote CVAs or schemes of arrangement to implement the Plan if they did not think it appropriate to do so, save only if the Plan Proponents purported to exercise powers derived from proxies obtained from creditors. They also agreed not to use any such proxies if and for so long as(a) the Protocol remained in place and(b) they took no exception to the realisation process pursued or proposed by the administrators. The Plan Proponents in all other respects reserved their rights.[62]On 10 September 2004 the administrators gave notice of their intention to restore the application for further hearing. In a witness statement dated 17 September 2004, Mr Gleave explained the administrators' reasons for this. They continued to have fundamental concerns about the terms of the Plan, which could be met only by changes to the Plan or by, in effect, bilateral deals with the creditor groups prejudiced by the Plan in its present form. The first had consistently been rejected, but there had been some cause to believe that the alternative of direct deals with the relevant creditor groups could resolve the problems and enable the administrators to promote CVAs and schemes of arrangement. There has been some criticism on behalf of the Plan Proponents to the administrators' approach to these alternatives, which I consider to be misplaced. Whatever the administrators' concerns about the Plan, there is no reason why they should not take steps to propose CVAs and schemes of arrangement if the affected creditor groups are satisfied with the arrangements for them. Mr Gleave stated that there had been negotiations between the Plan Proponents and the T&N pension trustees and useful discussions about the position of the UK Asbestos Claimants. While Mr Gleave remained optimistic that it might be possible to agree terms for treatment of the UK Asbestos Claimants, it would be conditional on agreement between the Plan Proponents and the T&N pension trustees and those negotiations had reached stalemate.[63]Discussions had continued with the Plan Proponents as to the alternative realisation in the event that an overall solution did not enable the administrators to support the Plan. The main issue which had precluded further progress was the question of control of the realisation process. This is a matter which I will consider later in this judgment.[64]The administrators also have major concerns about the compatibility with UK insolvency law of provisions of the Plan, contained in section 8.16 and dealing with the position if there are no CVAs or schemes of arrangement. The Chapter 11 proceedings and the UK administration proceedings relating to the UK Companies are both considered to be "plenary" proceedings, in the sense that neither is ancillary to the other. Both jurisdictions claim to have worldwide effect and it appears to the administrators that the Plan Proponents are attempting to obtain from the US Court orders which would be expressed in terms that directly affected the conduct of the administrations in the UK and would conflict with applicable UK law and practice. Some urgency has been given to this aspect by the filing on 16 September 2004 with the US Court of a motion by the Plan Proponents by which directions are sought as to the manner in which the administrators should realise assets of the UK Companies located in or controlled from the UK. By consent, the motion has been adjourned pending the outcome of the application for directions before me.[65]These considerations have led to serious concerns on the part of the administrators about the potential for conflicting orders of the US and English courts.[66]On 22 September 2004, Mr Justice Hart heard an application by the administrators for an expedited hearing of their application and for permission to amend it in various respects. As well as the administrators, the T&N pension trustees and the representatives of UK Asbestos Claimants, some of the Plan Proponents (the Official Committees of Unsecured Creditors and Asbestos Claimants and the debtor companies acting by their board of directors) were represented by counsel. Those Plan Proponents opposed the application for an expedited hearing, on a number of grounds, including that the administrators were seeking to have decided by the English court issues of which the US Court is or would be properly seised. Mr Justice Hart made an order for an expedited hearing, but in his judgment made clear the limitations on the scope of the hearing. He said at paragraphs 11 – 13: "11. It seems plain to me that the court hearing the Administrators' application on that occasion will not be in a position to make any determination which will in any sense be binding on anybody other than the Administrators themselves. It may, however, be in a position to offer a view, more authoritative than that which the Administrators themselves could offer to the United States court, as to what the effect of various possible permutations in relation to future events would be so far as UK insolvency law and administration are concerned. It may very well be that the United States court would be grateful to receive such a view.[12]All sides who have appeared before me are agreed that it is desirable that the respective courts in the exercise of their respective jurisdictions should, so far as possible, act in a co-ordinate way, respectful of each other's duties and, to that end, that the procedures should be designed so as to permit direct communication between the two courts.[13]It seems to me, as a first stage in that prima facie desirable procedure, the English court needs to be more fully informed by the Administrators than it currently is as to what the possibilities for such co-ordination are and what the obstacles to such co-ordination might be perceived to be, so that some either resolution or at least rational discussion can take place between the two jurisdictions at the court level." In relation to the Plan Proponents' motion filed with the US Court on 16 September 2004, Mr

Justice Hart said at paragraph 15:

"15. It seems to me that, having regard to what I conceive will be the much more limited nature of the application which will be before the English court on 4 th October, one which should not, as it seems to me, hold terrors for the proponents of the plan which their presence here in large numbers indicates it may have previously held for them, that it may be possible by agreement for the hearing of that United States motion to be deferred, subject to the agreement of the United States court, so that, whatever guidance the English court is able to give, both to the Administrators and to the United States court, can be available before the United States court has to determine that motion."
[67]Permission was given to amend the application to include applications for(i) directions to the administrators to attend and be represented at the hearing in the US Court to confirm the Plan and to oppose confirmation on grounds set out in the application which reflect their concerns mentioned above;(ii) directions to the administrators to attend and be represented at the hearing of any motions in the Chapter 11 proceedings which relate to or purport to affect the conduct of the administrations including the realisation of assets and to make such representations as may be appropriate; and(iii) directions for letters of request to the US Court and for other communications with the US Court, by telephone conference or otherwise. There was also added an application for directions in relation to the Protocol and the position of the directors, but they have not been considered at this hearing.[68]Mr Justice Hart gave leave to any interested party to appear at the hearing of the application for directions. Before me, there have appeared the administrators (represented by Mr Richard Snowden QC and Mr Peter Arden), the trustees of the T&N pension scheme (represented by Mr Simon Mortimore QC), the trustees of the Champion pension scheme (represented by Mr Keith Rowley QC and Miss Elizabeth Ovey), the representative UK Asbestos Claimants (represented by Mr David Allan QC and Mr Hugo Groves) and the Official Committee of the Asbestos Property Damage Claimants (represented by Mr Dominic McCahill). None of the Plan Proponents, three of whom had been separately represented by leading counsel before Mr Justice Hart, was represented. They were, however, supplied with the evidence and with daily transcripts and, as I understand it, representatives were present in court throughout the hearing. Their position was set out in a letter dated 1 October 2004 from their London solicitors, Sidley Austin Brown & Wood, which they asked to be shown to me.[69]All the creditors represented before me have supported the administrators' application, although there have been some differences of emphasis. In addition, they have raised further issues, including difficulties in reconciling some provisions of the Plan with UK pensions law.[70]In considering the directions to be given to the administrators, the following issues arise: i. Questions of fairness of the Plan. ii. The approach of the English Court to CVAs and schemes of arrangement designed to implement the Plan in England. iii. The compatibility with English pensions law of the proposals for the trustees of the T&N and Champion pension schemes. iv. The compatibility with English insolvency law of the provisions of the Plan designed to implement it as regards the English companies if the administrators do not propose CVAs and schemes of arrangement. v. Issues in connection with the motion filed on 16 September 2004 with the US Court (the Sales Motion).[71]The question of communication with the US Court has also been raised with me. All interested parties, including the Plan Proponents, consider that communication between the Courts is likely to be at least valuable, and perhaps essential, particularly if there is any real risk of conflicting orders. At the same time, the parties represented at the hearing before me agreed with my approach that the first step was for me to assimilate the issues arising in these complex cases and to give a judgment dealing with the administrators' application. Picking up on the invitation of the interested parties and the suggestion of Mr Justice Hart, this judgment can also offer some views on the effect of various aspects of the Plan so far as UK insolvency law and administration are concerned, and can also to the extent relevant seek to explain certain aspects of UK insolvency procedures and the approach of the English courts to them. These matters are not additional features to the judgment but are integral to a consideration of the administrators' application. It is the wish of all the parties that my judgment be communicated to the US Court and I am entirely content with that course. It seems to me that after that has been done and the US Court has been able to consider it, the question of further communications and their form can be considered.[72]Before turning to the specific issues arising for consideration, I will briefly outline the most salient features of the procedure relevant to these cases. Insolvency law: general[73]As in the United States, UK insolvency law is statute-based. The governing statute is the Insolvency Act 1986 (the 1986 Act), which has subsequently been amended in a number of respects, and it is supplemented by the Insolvency Rules 1986. The 1986 Act applies generally to England and Wales and to Scotland, but so far as the courts are involved it is separately administered by the courts of England and Wales and of Scotland. It is for this reason that the administration order for one of the UK Companies, which is registered in Scotland, was made by the Court of Session in Edinburgh while the remaining 133 administration orders were made by the High Court in London. Corporate insolvency is governed by Parts I – VII of the 1986 Act. Winding-up[74]Historically the principal procedure for insolvent companies was winding-up, often called liquidation. A winding-up may be commenced either by order of the court or by resolution of the shareholders. In either case, one or more liquidators are appointed to take control of the company's assets. Their duty is to realise the assets, whether on a going concern or a break-up basis. They have investigative powers and may pursue a wide variety of claims, including claims for misfeasance and to set aside prior colourable transactions, against officers and others. They have the further duty to distribute the proceeds of realisation among the creditors of the company. Subject to the rights of secured creditors and of the very limited number of classes which are given some statutory priority, the fundamental principle is that the distribution among creditors shall be on a pari passu basis. The Insolvency Rules lay down procedures for determining the validity and amount of claims by creditors, which in disputed cases will involve determination by the court, although in appropriate cases the court will allow claims to be determined through conventional litigation. Administration[75]Administration was introduced, principally as a means whereby the survival of companies or their businesses as going concerns could be promoted. In some cases administration also presents a better alternative to a winding-up for an orderly realisation of assets. The existing regime for the administrations has been replaced by a new regime introduced as Schedule B1 to the 1986 Act, but the existing regime continues to apply in cases where a petition for an administration order was presented before 15 September 2003. The administrations of T&N and the UK Companies continue therefore to be governed by the pre-existing Part II of the 1986 Act, comprising sections 8–27.[76]Under those provisions, it is only by court order that a company can go into administration. The administrators are appointed by the court and they are officers of the court (see In re Atlantic Computer Systems plc [1992] Ch 505 at 529) with the express right to seek the directions of the court under section 14(3), as the administrators are doing in the present application. I have already referred earlier in this judgment to the statutory duty of the administrators to take control and manage the business and assets of the company, coupled with the power to permit the directors to continue to exercise functions, as has occurred with the Protocol. The administrators have wide powers to realise assets of the companies. The exercise of these powers, and other powers associated with the management of the company's business, are regarded by the court as matters for the commercial judgment of the administrators, rather than as appropriate matters for directions by the court: see MTI Trading Systems v Winter [1988] BCC 591 and In re T&D Industries PLC [2002] 1 WLR 646. The court would not normally give directions to an administrator as to the means by which he should market assets, any more than as to which particular deal to make.[77]Under the administration regime applicable to the companies in this case, the administrators have no general power to distribute the proceeds of realisation among creditors. This is conventionally overcome by putting the company into winding-up immediately upon termination of the administration. In this way, the administrator effects the major realisations of assets and hands the proceeds over to the liquidator for pari passu distribution among the creditors, leaving it to the liquidator to deal for the most part with the admissibility and allowable amount of creditors' claims. Company voluntary arrangements[78]Part I of the 1986 Act, supplemented by the Insolvency Rules, makes provision for CVAs. The combined effect of sub-sections 1(1) and 1(3) is that, in the case of a company in administration, only an administrator may propose a CVA for that company. A CVA may involve a composition in satisfaction of the debts of the company. The administrator must summon meetings of the creditors and shareholders of the company to consider the proposal. Only one meeting of creditors need be held and it is to be summoned and conducted in accordance with the Insolvency Rules. If the proposal is approved at both meetings, the CVA automatically takes effect without the need for any court order and binds all creditors entitled to vote at the meeting, whether or not they in fact had notice of it. There are special provisions if the proposal is approved by only one of the meetings. Under section 6 of the 1986 Act, any creditor (amongst others) may apply to the court to revoke or suspend the decision approving the CVA on the grounds that it unfairly prejudices the interests of a creditor. There are other grounds of challenge. Schemes of arrangement[79]Schemes of arrangement are governed not by the 1986 Act but sections 425 – 426 of the Companies Act 1985. So far as concerns creditors, they enable a compromise or arrangement to be proposed between a company and its creditors. The scheme of arrangement embodying the compromise or arrangement is considered at a meeting of creditors or of each class of creditor, convened by order of the court on the application, in the case of a company in administration, of the administrator. Care is needed when determining the correct classes, for which purpose the relevant criteria are the existing rights of creditors and their rights as affected by the scheme. Where the scheme is proposed by an insolvent company and will stand as an alternative to a winding-up, the relevant existing rights are those which would apply in the winding up.[80]If the scheme is approved at the meeting or meetings by a majority in number representing three-fourths in value of the creditors voting in person or by proxy at the meeting, application may be made to the court to sanction the scheme. Apart from being satisfied that the procedural requirements have been met, the court must be satisfied that the scheme should be sanctioned so as to become binding on all creditors affected by it, including those who voted against it or abstained from voting. For this purpose the court will need to be satisfied that the scheme is fair, although it is not stated as a statutory requirement but it necessarily follows from the nature of the jurisdiction. Fairness: CVAs and schemes of arrangement[81]There is no statutory guidance on the criteria for judging fairness either for a scheme of arrangement under section 425 of the Companies Act 1985 or for a CVA under section 6 of the 1986 Act. There is a difference in the onus. Under section 425, it is for the proponents to satisfy the court that it should be sanctioned, whereas under section 6 it is the objector who must establish unfair prejudice. I do not, however, consider that there is any difference in the substance of the underlying test of fairness which must be applied. It is deliberately a broad test to be applied on a case by case basis, and courts have struggled to do better than the approach adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] Ch 213 and summarised in the often-cited passage from a leading textbook, Buckley on the Companies Acts :
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme."
That paragraph is directed to schemes of arrangement. The crucial difference with a CVA is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme. In considering unfair prejudice, the court will have regard to the different position of different groups of creditor. This, too, will be the case with a scheme of arrangement where groups of creditors with different interests or even rights nonetheless have been included in the same class for the purpose of considering and voting on the scheme.[82]While I am wary of laying down in advance of a hearing on the merits of any scheme or CVA any particular rule, there is one element which can be mentioned at this stage. I find it very difficult to envisage a case where the court would sanction a scheme of arrangement, or not interfere with a CVA, which was an alternative to a winding-up but which was likely to result in creditors, or some of them, receiving less than they would in a winding-up of the company, assuming that the return in a winding-up would in reality be achieved and within an acceptable timescale: see In re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 . Fairness of the Plan[83]It goes without saying that the fairness of the Plan for the purposes of confirmation under Chapter 11 is exclusively a matter for the US Court, on which this Court is not competent, in any sense of the word, to comment. Nor do the administrators or creditors ask me to make such comment. What I was however asked by some of the parties to say was that there is such a fundamental unfairness in the Plan that there is no prospect of the English Court sanctioning schemes of arrangement, or not acceding to challenges to CVAs, designed to implement the Plan in the UK.[84]The fundamental unfairness put forward lies in the disparity of treatment of unsecured creditors of different companies under the Plan when compared with their likely returns in a winding-up. This stems essentially from the return to the Noteholders under the Plan when compared with the return to other creditors. As I have already detailed, the return to Noteholders runs at anything between 38% and 51%, in the form of 49.9% of the equity of the reorganised FMC, which the Plan Proponents consider to be equivalent to a cash return of 35%. Accordingly, under the requirements of Chapter 11 for equal treatment to which I have referred, the return to the other unsecured creditors of companies liable in respect of the Notes is 35%. However, the liquidation analyses included in the disclosure statement demonstrate that on a liquidation the Noteholders and other unsecured creditors of those companies would receive a return of nil. By contrast, unsecured creditors of UK companies which have US asbestos liabilities would receive a return in a winding-up but will receive a return of 7.2% under the Plan. That is the estimated value of the return to Asbestos Claimants when the value of the 50.1% equity holding to be owned by the Asbestos Trust is divided by the estimated value of those claims.[85]The effects of this differential treatment are neatly illustrated by the example of the only English company which has any liability in respect of the Notes. F-M UK Holding Limited is an intermediate holding company for the entire UK group as well as for the former US subsidiaries of T&N. It has no assets of any value, apart from $1,000 in a bank account, and there is no prospect of any return to its creditors in a winding-up. Nonetheless, because it guaranteed the Notes, its unsecured creditors (if there are any) will receive a return of 35% under the Plan.[86]The administrators say that they have repeatedly raised this issue with the Plan Proponents and sought an explanation in writing of the rationale for the terms of the Central Deal between the Asbestos Claimants and the Noteholders, which then drives these different treatments. They say that they have received none, beyond what is stated in the disclosure statement in a passage at pages 76-77 and an indication at the hearing before Mr Justice Hart from counsel for the Debtor in Possession Management that one factor was the need to secure the agreement of Mr Carl Icahn who has an interest in a substantial number of Notes and who is to be involved in the management of the reorganised FMC. The trustees of the T&N and Champion pension schemes also point to the disparity of treatment between their claims and the position of the pension schemes of the US companies whose rights will not be disturbed.[87]It is also submitted, particularly by the T&N pension trustees, that there is a fundamental unfairness in the return to the unsecured creditors of the UK Companies being fixed by reference to a ratio based on Dr Peterson's estimates of US Asbestos Claims when(i) he is an advisor engaged by the Asbestos Claims Committee,(ii) the TDP values and his estimates on that basis are so out of line with all other estimates,(iii) there is no provision in the Plan for the values of the Asbestos Claims to be fixed by a court or otherwise in a manner that is fair and reasonable,(iv) there is no provision in the Plan for further amounts to be distributed to unsecured creditors if it appears that the estimated value of Asbestos Claims against T&N is excessive and(v) no account is taken of the lower level in the number and value of admissible claims if T&N went into winding-up. It is also submitted that there is substantial unfairness in basing the return either on the notional value of an equity holding in reorganised FMC or on the alternative notional asset values for which provision is made in the Plan.[88]In terms of considering the fairness of a scheme of arrangement or CVA to implement the Plan in the UK, I have no difficulty in saying that these issues would require the most careful consideration. However, in my judgment, the court cannot at this stage conclude that they render any scheme or CVA fundamentally unfair. It is premature to decide the issue. If schemes of arrangement or CVAs come before the Court for consideration, either under section 425 of the Companies Act 1985 or under section 6 of the 1986 Act, or an application is made by some creditors for an order requiring the administrators to put forward schemes of arrangement or CVAs, this Court must then consider the issue. The court cannot now pre-empt its decision on such applications. Nor should it reach decisions in the absence of the submissions and evidence of those parties who would wish to argue the contrary. In the light of the limited scope of this application, as described by Mr Justice Hart, the Plan Proponents cannot be criticised for not putting forward their submissions and evidence on fairness at this stage.[89]Nonetheless, my acceptance that the administrators have raised matters of real substance provides a basis which would justify their participation in the confirmation hearing for the Plan in the US Court. Recovery under the Plan[90]It is the administrators' case that a controlled realisation of the assets of the UK Companies followed by a pari passu distribution of the proceeds among the creditors in a winding-up of the companies, or more probably pursuant to schemes of arrangement or CVAs, would result in a better recovery for creditors than under the Plan. As with the submissions on fairness, this is strongly supported by the other creditor groups represented before me.[91]Recovery is determined by the result of a division of the proceeds or value of the available assets (the numerator) by the amount of the relevant liabilities (the denominator). A major challenge is made to both the numerator and the denominator used for the purposes of the Plan.[92]The administrators have conducted an analysis in order to establish the realisable values of the assets of the UK Companies on the basis of a controlled realisation process. As I have previously made clear, such a process would be conducted by the administrators and is not the same as a sale process conducted by liquidators in a winding-up. In addition to applying their own commercial judgment, the administrators commissioned reports from two firms of independent advisors, who have been instructed to adopt a cautious and conservative approach and to form an impartial view. The advisors took account of points made by the Plan Proponents, and the midpoint realisation estimate put forward by the administrators on the basis of their advice is $1.116 billion. The T&N pension trustees instructed Grant Thornton to provide advice on this issue and their estimate is $993 million. In contrast, the Plan Proponents now contend for a realisation estimate of $488 million.[93]Two factors in particular have been put forward by the Plan Proponents to support their estimate. The first relates to "successor liability", a concept under US law whereby a purchaser or transferee of a business may be liable for asbestos claims associated with the business by reason of being the successor to the business. The US Court is empowered to grant injunctions which would protect the successor against such claims. Under the Plan it is proposed that such injunctions should be granted only if reorganised FMC is the purchaser of the relevant businesses. The administrators consider that in a Plan designed to produce the best result for all creditors, an application for injunctive relief to provide protection to only one prospective purchaser cannot be appropriate. The decision as to what, if any, injunctions to grant in this respect is a matter for the US Court. The administrators submit that the existence of such injunctions, granted on the application of the Plan Proponents, would be relevant on a consideration by this court of the fairness of CVAs or schemes of arrangement designed to implement it. It is in my view too early to say whether that is so, but equally I cannot now say that it would be irrelevant.[94]The second factor is the difficulty of separating the business of the UK Companies from the worldwide business of the rest of the FM group, coupled with threats of non-cooperation by the rest of the group in any independent realisation by the administrators. The valuations are prepared on the basis that the assets of the UK Companies would be sold separately from the other FM group companies. While the valuations assume a degree of cooperation, the administrators submit that it is difficult to assess the impact of this factor as well as the seriousness of the threats, while pointing out that non-cooperation could well also be harmful to the rest of the FM group.[95]The challenge to the denominator centres on the estimate of asbestos claims against T&N. Under the Plan that is the sole denominator for determining the return to all unsecured creditors of those companies, subject only to alternatives offered to the pension fund trustees. I have already referred to the evidence on this question. The administrators and the T&N pension trustees have both subjected Dr Peterson's estimate of $10.5 billion for US claims to detailed scrutiny. There is a considerable number of issues at play, but the most important are the US claim values adopted for use in the Trust Distribution Procedures (TDP) of the Asbestos Trust and the assumed numbers of US claims. It is unclear how the TDP claim values have been arrived at, but it is clear that they represent a very large increase on values based on the historical experience of resolutions in the years 1998 – 2001. For example, Dr Peterson's figures demonstrate that the average amount paid by T&N for a US mesothelioma claim in the period 1998 to 2001 was $67,133, whereas the average value given to a US mesothelioma claim in the TDP is $251,624. As regards the assumed number of claims, the administrators point out that an assessment of liability undertaken in the context of the winding-up of the UK Companies is likely to result in appreciable reduction in admissible claims, by focussing more closely on issues of liability and causation than might otherwise be the case.[96]The Administrators do not invite me to make any findings or reach any conclusions as regards the values properly to be ascribed to the assets and liabilities of the UK Companies. As I have already indicated, it would be an issue of great significance on any application concerning CVAs or schemes of arrangement to implement the Plan. I am told that a similar question will arise at the confirmation hearing in the United States. To satisfy the test of the best interests of creditors, the Plan must provide that all dissenting creditors, even if their class has approved the Plan, must receive at least as much under the Plan on account of their claims as they would if the debtor company were liquidated under chapter 7 of the Bankruptcy Code.[97]I am satisfied on the evidence which has been put before me that the administrators would be justified in making their submissions to the US Court at the confirmation hearing. They can then be considered by that Court in the light of the submissions and evidence of all interested parties, just as any such submissions and evidence would be considered by this Court in connection with any CVAs or schemes of arrangement. UK Asbestos Claimants: opposition to the Plan[98]The UK Asbestos Claimants have supported the objections to the Plan raised by the administrators. In particular, they regard the value attributed to US asbestos claims as resulting in an unacceptable cramdown of recoveries for established and likely UK claims by giving unjustified weighting to speculative claims. They find it hard to understand how the estimate for US claims can have nearly doubled from $5.7 billion to $10.5 billion, when it is accepted that the conditions which must be satisfied for payment under the TDP will result in the disallowance of a much larger percentage of claims than have previously been closed without payment.[99]In addition, there are a number of further points which have been raised. First, the TDP has eight disease levels, of which level 1, described as "other asbestos disease", is the least serious and attracts a minimum payment of $400. Level 1 claimants take priority along with liquidated pre-petition claims, and if there are insufficient funds in one year to pay them they take priority in subsequent years. There are 120,000 pending claims for non-malignant asbestos disease, and Dr Peterson estimates over 1,081,000 such claims in the future, many of which are likely to be level 1. Although Dr Peterson suggests that the number of level 1 claimants who will actually pursue their claims will be small, it is nevertheless suggested by the UK Asbestos Claimants that there is a real danger that a large number of level 1 claimants, attracted by a quick payment, will exhaust the available funds in the early years of the Asbestos Trust.[100]Secondly, they are concerned about differences in the treatment of US and UK claims. For UK claims, the TDP ascribes different values depending on whether the exposure to a T&N product has been 90% or more, or less than 90%, with the value for the former being some 2½ times higher than the latter. While there is a single matrix for US claims, a US claim can qualify as an "extraordinary claim" if 75% or more of the exposure has been to T&N products. An extraordinary claim can be paid up to five times the scheduled value. Moreover, the US extraordinary claims take priority ahead of all other claims except level 1 claims, pre-petition liquidated claims and exigent hardship claims. No such priority is offered to UK claims.[101]Thirdly, they are concerned that they will be required to release rights to sue UK companies in the UK courts in respect of claims governed by UK law, and will instead have their rights adjudicated in the United States by US representatives of the trustees under procedures governed by US law. Apart from anything else, this raises issues of the costs associated with making application under the TDP and whether there is likely to be any worthwhile return justifying those costs, especially when there is taken into consideration the question of the deduction of UK statutory benefits from any payment by the trust.[102]Fourthly, claimants under the TDP must demonstrate exposure to relevant asbestos products before 31 December 1982. While most UK claims will have originated with exposure before that date, it is not a date which has any significance in UK law and there may be cases of exposure exclusively after that date.[103]Fifthly, claims which arise from exposure outside the United States, the UK and Canada can proceed under the TDP only by way of individual review. If rejected, a claim can be brought only in the "Claimant's Jurisdiction", which, except for claims filed before the petition date, means the jurisdiction in which the claimant resided at the time of diagnosis or at the time of filing his claim with the Asbestos trust or in which he was exposed to asbestos or an asbestos product. In Lubbe v Cape plc [2000] 1 WLR 1545 , the House of Lords held that former employees of mining subsidiaries of Cape plc in South Africa could bring claims in England. Similar claims were filed by former employees of a T&N mining subsidiary in Swaziland before the petition date, but any further similar claims could not be pursued if the Plan is made effective.[104]It may well be that at least some of these points could be met without difficulty by amendment to the Plan. They amount to a body of issues which require serious consideration when assessing the fairness of the proposals as they affect the UK Asbestos Claimants. It may not be practicable for them to be represented at the confirmation hearing. If so, it would be appropriate for the administrators to raise these issues. They would fall to be considered by this court if raised on a hearing determining the fairness of a CVA or scheme of arrangement. Pension scheme trustees: objections to the Plan.[105]The trustees of the T&N pension scheme have, like the administrators, addressed in detail the issue of recovery under the Plan as against recovery from a controlled realisation process followed by a distribution. They have commissioned their own reports on the value of assets and estimates of asbestos liabilities. I have referred to the conclusions of those reports and to the challenge to the TDP values and Dr Peterson's figures for the US asbestos claims on which the plan is predicated. Their approach is supported by the trustees of the Champion pension scheme.[106]Both sets of trustees have also subjected to close analysis the terms of the Plan as it particularly affects them. The relevant terms are in sections 3.6.4 (the T&N pension scheme) and 3.7.3 (Champion pension scheme) of the Plan and they are summarised on pages 12-14 of the disclosure statement. There are differences in the detail, but in broad terms they are similar. Each is first offered what is called "Let it Run" treatment. It involves the following principal features: i. Each scheme will continue "as modified". The modifications have not been fully detailed. ii. Current active employees will be offered a choice with respect to pension benefits relating to services performed after the effective date of the Plan. The choice is not clear. iii. The contribution rate from the effective date to 30 April 2012 will be limited to the annual maintenance cost with respect to services rendered after the effective date by current active employee participants who choose to remain in the scheme, provided it is lower than current annual funding. There are uncertainties surrounding the determination of the annual maintenance cost. Further, there is no indication of what, if any, contributions are to be made by T&N or FMI after 30 April 2012 if the schemes are not terminated on that date. iv. No annual contributions will be made to the schemes in respect of the underfunding that relates to prior service by retired, deferred, or active members. v. T&N and FMI (but not the trustees) shall have the right, but no obligation, to terminate their respective schemes on or after 30 April 2012. In the event of such termination, the trustees of the T&N scheme shall receive a cash sum equal to "the Allowed Amount of the Non-Priority T&N Pension Plan Employee Benefit Claims against all UK Debtors calculated as of the Petition date multiplied by T&N Distribution Ratio 1 plus interest at market rate from the Effective Date through the date the T&N Pension Plan is terminated." If the Champion Scheme is terminated by FM Ignition, its trustees will receive a cash sum calculated on the same basis except that the multiplier is "the greater of T&N Distribution Ratio 1 and the Company Specific Distribution Ratio." There are uncertainties as a matter of construction as to the intended meaning of the "Allowed Amount" and the "Company Specific Distribution Ratio". vi. In either case, such payment will be in full satisfaction of the trustees' claims against the relevant UK Companies. vii. The trustees shall, to the extent permitted by applicable law, continue the current investment strategy in consultation with T&N or FMI (as the case may be) and will not change the investment strategy without approval from T&N or FM Ignition (as the case may be)[107]Both sets of trustees are applying to the court for directions as to whether they should vote in favour of the Plan. For the T&N trustees that would mean acceptance of Let it Run: for the Champion trustees that would mean that they could later choose between Let it Run and an alternative treatment, called Alternate Payout, considered further below. Both sets of trustees do not consider that they can accept Let it Run as a matter of pensions law and, in any case, they regard it as an entirely inadequate response to the deficits in the schemes. In general terms, it is said by the trustees to rely too heavily on the hope that improvements in equity markets will alleviate the deficiency. As respects the T&N scheme, it is also considered unacceptable because the amount which would be payable on or after 30 April 2012, estimated at about £63 million, is arrived by the application of the T&N Distribution Ratio 1. That Ratio proceeds on the basis of the estimate of $10.5 billion for US asbestos claims already discussed. Again, as already discussed, the trustees believe that a controlled realisation of assets by the administrators will produce a greater return.[108]In any event, however, Let it Run suffers from defects which, the trustees submit, prevent them from accepting it. First, the trustees would continue to operate schemes with substantial deficits in circumstances where there would be no realistic prospect of restoring the deficit. In these circumstances, the trustees would unfairly prefer the interests of current pensioners, and those with pensions commencing while the scheme was still being operated, to the interests of deferred and active members. The reasoning is set out in a declaration of leading counsel specialising in pensions law put before the US Court on the hearing to approve the disclosure statement. If the assumption made as to the lack of any realistic prospect of restoring the deficit is correct, this is clearly a very powerful point.[109]Secondly, the trustees submit that acceptance of Let it Run is not lawfully available because it would involve an invalid attempt to contract out of the provisions of the Pensions Act 1995 which require the employer to make payments to meet the minimum funding requirements as and when they arise as a result of triennial valuations (section 56-61) and to meet deficiencies under section 75. The terms of Let it Run appear to be incompatible with both sets of obligations. In deciding that trustees of a pension scheme would have power to compromise an accrued obligation by the employer under section 75, Mr Charles Aldous QC (sitting as a deputy judge of the High Court) in Bradstock Group Pension Scheme Trustees Ltd v Bradstock Group plc [2002] PLR 327 expressed the view that it was not possible to agree terms which had the effect of contracting out in advance of either sections 56 to 61 or section 75. He said at para 14:
"It was rightly accepted that it was not possible to contract out of the trustees' and employer's obligations to comply with the MFR regulations nor in advance to contract out of the provisions of s 75. Whilst the scheme is ongoing trustees cannot waive the need for compliance nor negotiate a more lenient schedule of contributions than the regulations prescribe, nor equally can they, in my judgment, contract out of the effect of s 75 in advance of the section coming into play. However, there is a clear distinction between this and trustees compromising or settling a debt which has arisen under s 75 in the best way they reasonably can for the benefit of their scheme members."
I entirely agree with both the statement of law and the reasons for it. Subject to any contrary argument, it appears to me to represent a real obstacle to acceptance of Let it Run.[110]A further legal difficulty is presented by section 35(4) of the Pensions Act 1995 which provides that:
"Neither the trust scheme nor the statement [of investment principles] may impose restrictions (however expressed) on any power to make investments by reference to the consent of the employer."
The terms of Let It Run dealing with investment decisions conflicts with this statutory prohibition.[111]There are therefore a number of substantial grounds in support of the trustees' views that it is not open to them to accept Let it Run, even if, which is not the case, they considered it to be an attractive proposition. Let it Run is under the terms of the Plan available to each set of trustees, only if three conditions are satisfied: i. They vote in favour of the Plan. ii. They give an irrevocable undertaking to vote in favour of any CVA or scheme of arrangement promoted to implement the Plan. iii. The administrators promote such CVAs and schemes of arrangement with respect to T&N or FMI (as the case may be): this is my reading of the effect of the condition expressed as "if the Consensual Marketing Procedures are not performed with respect to" T&N or FM Ignition.[112]The Champion trustees, unlike the T&N trustees, have the right, if the conditions mentioned in the preceding paragraph are satisfied, to elect for the Alternate Payout treatment instead of Let it Run. Alternate Payout is defined in section 3.7.3 of the Plan as having the following features:
"(A) On the Effective Date, the FM Ignition Pension Plan shall pay the FM Ignition Pension Plan Trustees an amount sufficient to purchase annuities to secure the benefits of participants retired and currently receiving pension payments. (B) Actuarially equivalent transfer values would be provided to non-pensioner participants (assuming no cost of living adjustments.) Actuarial assumptions will be the same as used in that certain August 2003 Transfer Value change assumption calculation. (C) Contributions by Reorganised FM Ignition to fund (A) and (B) shall be limited to no more than £9 million."
The trustees of the Champion pension scheme raise a number of issues with this alternative treatment. First, it is unclear whether the scheme is to continue or be terminated. If it is to continue, it shares the same problems as Let it Run in terms of contracting out of sections 55-61 and 75 of the Pensions Act 1995. Secondly, they have raised in their submissions a number of uncertainties. As in the case of Let it Run these uncertainties, unless answers are given, make it difficult, perhaps impossible, to reach a decision on the merits of the alternative treatment. The court would expect those proposing a CVA or scheme of arrangement to respond to reasonable requests for information or clarification. The Champion scheme trustees do not appear to have received responses to their requests.[113]If any of the conditions set out in paragraph 111 are not satisfied, or presumably if the trustees do not cooperate to give effect to Let it Run, the Plan makes express provision, in the case of the T&N pension scheme, for such other treatment as may be agreed. The final default position under the Plan for both pension schemes is that their claims will be compromised in the same manner as other unsecured claims against UK Companies. The T&N pension scheme would receive a recovery of 7.2% under T&N Distribution Ratio 1 but only if the administrators promote CVAs and schemes of arrangement, or 3.8–6.0% under T&N Distribution Ratio 2.[114]The denominator for each of these Ratios is, or includes, the values of Asbestos Claims estimated in accordance with the TDP. It is therefore subject to the challenges already referred to in this judgment. The numerator is different in the two Ratios. In Ratio 1, it is "79% of the value of the Reorganised Federal-Mogul Class B Common Stock as determined at the Confirmation Hearing": see section 1.1.147 of the Plan. The Class B Common Stock is the stock to be held by the Asbestos Trust, representing 50.1% of reorganised FMC's common stock, and 79% of that stock will be allocated to the sub-fund for the asbestos liabilities of the UK Companies. The amount of this numerator is estimated by the Plan Proponents at $790 million (disclosure statement p 105). The numerator in Ratio 2 is "the value of T&N Limited's assets as determined at the Confirmation Hearing either in accordance with the Consensual Marketing Procedures or as otherwise determined by the Court": see section 1.1.148 of the Plan. These formulae are subject to the challenges as to asset values, which again I have referred to earlier in the judgment.[115]The effect of both T&N Distribution ratios is also subject to the challenges on grounds of fairness made by the administrators and pension fund trustees. First, there is the disparity in the returns for unsecured creditors of the UK Companies when compared with the recoveries for unsecured creditors of the US Companies (and FM-UK Holdings) who would receive no return in a winding-up of those companies. Secondly, there is the disparity of treatment between the UK pension funds and the pension funds of US Companies whose rights are unaffected by the Plan. A short explanation appears at pages 120 – 121 of the disclosure statement, but the Trustees submit that it is inadequate.[116]The default position for the Champion pension trustees is by reference to a different ratio, the Company Specific Distribution Ratio, which applies if it produces a greater cash payment than T&N Distribution Ratios 1 or 2: section 3.7.2(a) and (b) of the Plan. This is defined at section 1.1.44 of the Plan, partly by reference to the figures in Exhibit L to the Plan. Those figures give a range of estimated recovery of 13.4–24.8%, dependant on asset values estimated in a range of $19.8–32.9 million. Not unreasonably, in the light of this range the Champion pension trustees find it difficult to compare the results of this default treatment with the results of other options, but in any event the definition of Company Specific Distribution Ration presupposes a specific figure, not a range. Special case companies[117]In assessing the effect of the proposals contained in the Plan, and in any CVAs or schemes of arrangement to implement it, it is important to note the obvious point that each company has different assets and liabilities. All or virtually all US Asbestos Claims have been made against T&N, but other UK Companies have substantial assets and owe significant sums to the UK Asbestos Claimants and the pension fund trustees. It is submitted by them, and by the administrators, that the proposals contain no adequate recognition of their prospects of enhanced recovery against those companies.[118]The manufacturing and trading subsidiaries of T&N carried on business as undisclosed agents for T&N pursuant to agency agreements entered into from time to time. The administrators have been advised, therefore, that the employees and third parties who dealt with those companies as if they were principals are entitled to elect to enforce their claims against either the relevant subsidiary or T&N. Some of the UK employer's liability claims pending at the commencement of the administrations are against subsidiaries: for example, 79 claims totalling £1.2 million against Federal-Mogul Friction Products Limited and 183 claims totalling £2.6 million against TBA Industrial Products Limited. Likewise, the trustees of the T&N pensions scheme have present claims totalling some £80 million against the 12 subsidiaries which terminated their participation in the scheme in July 2004.[119]The trustees of the T&N pension scheme have been advised that on a controlled realisation of the assets of the subsidiaries, they would expect to recover £52–64 million on account of their claims. The liquidation analyses of some of the companies contained in Exhibit J to the Plan show either a very substantial level of recovery or even complete recovery for unsecured creditors. However, the proposals in the Plan would involve the low level return being applied to some of these companies (TBA Industrial Products Limited, Federal-Mogul Friction Products Limited, Federal-Mogul Sealing Systems (Rochdale) Limited and Federal-Mogul Sealing Systems (Slough) Limited). This is justified by reference to the following note appearing on the relevant liquidation analyses:
"The Plan Proponents believe that this entity produced and distributed products containing asbestos into the world-wide stream of commerce for many years, and therefore, the Plan Proponents believe that it has substantial liability for future claims, even though only a limited number of asbestos claims have been asserted against it to date."
The administrators point out that there is no record of any exposure for these companies to claims by US Asbestos Claimants.[120]The issues relating to these companies will be carefully scrutinised by an English court if asked to consider the fairness of CVAs or schemes of arrangement to implement the Plan. Implementation of the Plan in the UK[121]As already mentioned, it was originally the common approach of the management of the US and UK companies, the Official Committees and the administrators that the proposals in the Plan would be implemented in the UK by means of CVAs and schemes of arrangement. The reason for doing so is clear. Those creditors whose claims are governed by English law will not, as a matter of English law, be bound by a compromise contained in a Plan confirmed under Chapter 11: New Zealand Loan and Mercantile Agency Co v Morrison [1898] AC 349 . In the absence of individual agreement, this can be achieved only by the collective mechanisms under English law provided by CVAs and schemes of arrangement.[122]In approaching the issues arising in relation to any such CVA or scheme of arrangement, the English Courts would pay the closest regard to the US Court's analysis of the Plan and its reasons for confirming it. The English Courts, however, remain bound by statute to give their own consideration to the fairness of the CVAs or schemes of arrangement and, notwithstanding the strong cross-border element and the desirability of concerted action, have no right or power to cede or qualify that jurisdiction.[123]In my judgment, it is not surprising that this should be the case, particularly in relation to the facts of this case. Federal-Mogul is a major US corporation, but its UK based subsidiaries are themselves substantial businesses, which as it happens, were until recently an independent group. It seems to me entirely natural that a plan of reorganisation directly affecting the creditors of both US and UK companies should be subject to the process of the courts of both jurisdictions and be subject to a consideration of its merits and fairness by the courts of both jurisdictions, whether that consideration is a necessary pre-condition, as in the case of a plan under Chapter 11 or a scheme of arrangement, or the result of a challenge, as in the case of a CVA.[124]Faced with the prospect that the administrators do not consider, and may well not in the future consider, it appropriate to propose CVAs or schemes of arrangement, the Plan Proponents have included in section 8.16 of the Plan a series of alternatives designed to implement the Plan, or at least accommodate the position of the UK Companies, in the event that the administrators do not propose CVAs or schemes of arrangement.[125]The administrators and the T&N pension trustees have raised on this application objections as a matter of English law to these alternative procedures. It seems to me important that these issues should be addressed at this stage, rather than only after the US Court has given its consideration to the Plan. If certain aspects of the plan cannot work as a matter of English law, it is likely that the US Court would wish to be aware of that. This was the approach adopted by Mr Justice Hart in paragraphs 11 and 15 of his judgment which I cited earlier.[126]The Plan Proponents decided not to be represented at this hearing. I have already made clear that as regards submissions on the fairness of the Plan and on the merits of the Plan as against a controlled realisation process, it seemed to me that it was reasonable for them not to make their case at this stage and on this application. However, if they had any submissions to make on the impact of English law on their alternatives in section 8.16 of the Plan, it appeared to me that this was the right time to make them, in order that the best view could be offered to the US Court on these issues. Accordingly, at my request, the administrators' solicitors wrote to Sidley Austin Brown & Wood, solicitors for the Plan Proponents, stating that I would welcome submissions on these issues. They replied, declining to make any submissions and suggesting that addressing these issues of English law at this stage would involve pre-empting the decision of the US Court at the confirmation hearing. Since, as Mr Justice Hart had already made clear, the purpose was to provide assistance on issues of English Law to the US Court, I do not accept that there is any question of pre-empting the decision of that Court. It is certainly not my intention to do so.[127]There are a number of methods set out in the Plan whereby the Plan Proponents would seek to implement it if the administrators do not voluntarily propose CVAs and schemes of arrangement.[128]First, section 6.6 makes provision for the use of demands and proxies obtained from creditors in the Plan solicitation process to require the administrators to convene meeting of creditors under section 17(3) and to procure the passing of resolutions that the administrators either propose CVAs and schemes of arrangement or seek the discharge of the administration orders so that the directors can do so. The administrators have raised detailed arguments on the validity under the Insolvency Rules of the forms of proxy which the Plan Proponents are soliciting for this purpose. These points will require serious consideration if and when the Plan Proponents ever seek to use them, but I do not consider it necessary or appropriate to rule on them at this stage.[129]More importantly, although section 17(3) is expressed in apparently mandatory terms, it is established that the Court is empowered to direct that administrators need not comply with demands for a meeting or, it must follow, resolutions passed at such meetings: In re Barings plc (No 6) [2001] 2 BCLC 159 (a decision on the equivalent provisions applicable to liquidators). I have no doubt that, if the administrators and a significant body of creditors considered the proposed CVAs and schemes of arrangements to be unfair or seriously flawed in other ways, the Court would at that stage give the most serious consideration to whether the administrators should be required to proceed with the CVAs and schemes of arrangement. If it concluded that they should not do so, I see no prospect, given the insolvency of the companies, of a discharge of the administration orders to enable the directors to do so instead.[130]If CVAs and schemes of arrangement are not proposed to implement the Plan, the administrations will continue. This means that the administrators will be required to continue to perform their statutory duties under Part II of the Insolvency Act 1986, subject to the supervision, as appropriate, of this Court. It also means that the administrations would continue for the sole purpose, added to most of the orders in July 2004, of achieving a more advantageous realisation of the company's assets than would be effected on a winding-up of the company. Their responsibilities would include obtaining the best value reasonably obtainable for the assets: see In re Barings plc (supra) at para 46.[131]In the absence of CVAs and schemes of arrangement, the Plan envisages as a first alternative that the Plan Proponents will attempt to reach an agreement on "Consensual Marketing Procedures" with the administrators (section 8.1.1). Such Procedures are defined in section 1.1.49 and are more fully described in section 8.16.1 as follows:
"the Plan Proponents will work towards an agreement on Consensual Marketing Procedures with the Administrators to retain those UK businesses that are valuable to Federal-Mogul Corporation and its customers and to jointly market those UK businesses that are not valuable to Federal-Mogul Corporation and its customers….."
This is silent as to the terms on which reorganised FMC would "retain" the businesses valuable to it. If it suggests that less than full market value be paid, it would conflict with the administrators' duty to which I have just referred. The Plan envisages that if Consensual Marketing Procedures are agreed, Asbestos Claims will lie against the Asbestos Trust. It is conceivable that the English Court would sanction a disposal by the administrators on terms that the selling companies were relieved of liability for US Asbestos Claims, which itself could only be achieved by appropriate orders of the US Court. However, the English Court would have to be satisfied that this produced at least as good result for the remaining creditors as a sale at full market value.[132]The adoption of Consensual Marketing Procedures could not however affect the rights of UK Asbestos Claimants (or any other creditors) whose claims were governed by UK law. There are two aspects to this. First, as creditors of English companies with claims governed by English law, those claims can be compromised only with their consent. Secondly, as the companies are insured against their liabilities to the UK Asbestos Claimants, the claimants have direct rights against the insurers under section 1 of the Third Parties (Rights Against Insurers) Act 1930. The policies in question are governed by English law. Under the Plan such rights are to be transferred to or for the benefit of the Asbestos Trust, but as a matter of English law those rights can likewise be affected only by consent or by CVAs or schemes of arrangement. Further, the insurers would have no defence to a claim brought by a UK Asbestos Claimant in the UK on the grounds of the terms of the Plan or injunctions made in support of it: Libyan Arab Foreign Bank v Bankers Trust [1984] QB 728.[133]The Plan further provides in section 3.6.3 (C) that if the Consensual Marketing Procedures have been performed, "Allowed Unsecured Claims", which would include the claim of the trustees of the T&N pension scheme, would receive payments based on T&N Distribution Ratio 2. For the reasons given above, I have difficulty in seeing how such arrangements could become binding as a matter of English law on those creditors.[134]It is contemplated, as the next fall back position, that the English Court would be asked to give effect to the Plan on grounds of comity. In the absence of any submissions developing the case for the use of comity in this way, I intend to say little about it. I will just make these observations. Comity, as a means of achieving cooperation between different jurisdictions in cross-border insolvency cases, is of great importance. It is a highly relevant factor in the exercise by the court of discretionary powers. It does not, however, enable the court to alter or dispense with mandatory provisions of the law which it administers. This is the case even in an ancillary winding-up in England of a foreign-registered company: see In re Bank of Credit and Commerce International (No 10) [1997] Ch 213. Further, if the position were reached that the English Court considered that CVAs or schemes of arrangement designed to implement the Plan were unfair and would thus not be sanctioned or allowed to stand, it is very difficult to see that the Court would nonetheless give effect to it as a matter of comity, always assuming that it had the jurisdiction to do so.[135]Sections 8.16.3 and 8.16.4 make provision for what is to occur if the Plan cannot be given effect in the UK through CVAs or schemes of arrangement or an appeal to comity. Section 8.16.3 provides that FMC "shall bid for those UK businesses and assets that are valuable" to it. If any such bids are successful FMC will have the benefit of the injunction under section 524(g) and any successor liability claims will be channelled to the Asbestos Trust. Such protections will not be available to any other purchaser. Section 8.16.4 goes on to provide that if FMC is the purchaser of any UK businesses and assets, then it shall pay to the selling companies only that portion of the bid that is to be distributed to creditors other than the holders of Asbestos Personal Injury Claims against those companies. The holders of those Asbestos Claims will receive distributions from the Asbestos Trust in accordance with the TDP. If, however, FMC is required to pay the full amount of its bid, then the full amount of any distribution to the holders of Asbestos Personal Injury Claims in or arising out of the administration shall be paid to the Asbestos Trust and remitted to FMC.[136]The administrators submit, and I agree, that there are aspects of these provisions which are inconsistent with UK insolvency law. First, it is not possible to split the creditors and provide that the claims of some shall lie against the Asbestos Trust, not the relevant companies. Secondly, it would not be possible in these circumstances to provide for the payment by FMC of less than full market value. The only exception to these two propositions would be if by some mechanism, such as injunctions granted by the US Court, the US Asbestos Claims could no longer be pursued against the UK Companies and the English Court was satisfied that there was a clear benefit to the remaining creditors of those companies. Thirdly, in the absence of assignments, distribution out of the assets of the UK Companies can be made only to the creditors whose claims are admitted, and could not for example be paid to the Asbestos Trust. Fourthly, if the provisions are intended to cover insurance recoveries, the right to those recoveries belong to the relevant claimants and cannot be interfered with except with their consent or by CVA or scheme of arrangement. Again, it may of course be open to the US Court to take effective steps by injunctions or otherwise binding US Asbestos Claimants, but such steps would not affect the position of UK-resident claimants with claims in the UK. Sales Motion[137]As I have mentioned, the Plan Proponents filed a motion with the US Court on 16 September 2004, by which they seek directions binding the administrators as to procedures which they should follow in marketing and selling the businesses and assets of the UK Companies. It has been adjourned pending the outcome of the present application. On the same day the Plan Proponents filed another motion with the US Court, naming the trustees of the T&N pension scheme as respondents and seeking to fix the amount of T&N's liability to the trustees. On 7 October 2004 the US Court dismissed that motion on the grounds that it was a matter governed by English Law between an English company and an English creditor and should be pursued, at least in the first instance, in the English courts.[138]As I have explained earlier in this judgment, the administrators of the English companies are officers of this court who are bound by duties in English law with regard to the realisation of assets and are subject to the directions of the English Court. It may also be observed that under the provisions of the Protocol, particularly clauses 5.2 and 9.1, the method of marketing and selling the UK assets of the English Companies would appear to be a matter for the English Courts. I observed in argument that if a creditor of a US corporation applied to the English Court for directions to be given to an officer of the US Court, or indeed to the corporation itself, as to the manner of disposal of assets in the United States, the application would be refused within minutes. On further consideration, I see no reason to alter that assessment. Directions[139]The administrators seek, first, a direction not to propose CVAs or schemes of arrangement to implement the Plan without further order of this Court. I consider it appropriate to give this direction. The administrators have raised serious issues concerning the fairness of any such CVAs or schemes of arrangement, and it is their view that they should not propose any such CVAs or schemes. It is premature to consider or rule on any issue of fairness, but in the light of the administrators' concerns, and the concerns of the various creditors represented before me, it is right in my judgment that the matter should come back to this court before the administrators take any steps to promote any such CVAs or schemes, whether of their own accord or pursuant to any resolutions of meetings of creditors. As it happens, this is not likely to be a controversial direction, because the Plan Proponents are not requesting the administrators to take any such steps at this stage.[140]Secondly, the administrators seek a direction not, until further order, to convene meetings of creditors of any of the companies pursuant to demands or requisitions that may be made pursuant to sections 6.6 and/or 8.16.2 of the Plan. In the particular circumstances of this case, which require a greater degree of control by the court than usual, I will make this direction.[141]Thirdly, the administrators seek directions to file objections and be represented at the Confirmation Hearing and to oppose confirmation. As I have indicated at various points in this judgment, I am satisfied that the administrators and the creditors represented on this application have raised serious issues requiring consideration with respect both to the fairness and to other aspects of the proposals embodied in the Plan. I do not consider that it would be right to direct the administrators to oppose confirmation, in the sense of requiring them to do so. It is however appropriate to give them liberty to be represented at the hearings and to oppose confirmation. I propose to give similar liberty in relation to the Sales Motion.[142]I will hear the administrators as to any further directions which they require at this stage. I will add that, in view of the complexity of these cases as well as the desirability of having a single judge for the purposes of communication with the US Court, I will so far as practicable reserve to myself all further applications in these administrations.

order

(a) to promote the orderly and efficient administration of the Insolvency Proceedings to, amongst other things, maximise the efficiency of the Insolvency Proceedings, reduce the costs associated therewith, and avoid duplication of effort;(b) to harmonise and co-ordinate activities undertaken in the Insolvency Proceedings;(c) to implement a framework of general principles to address certain business, administrative and management issues arising by virtue of the international nature of the Insolvency Proceedings; and(d) to facilitate the fair, open and efficient administration of the Insolvency Proceedings for the benefit of all of the Debtors, their creditors and other interested entities wherever located."

Cited in 26 later judgments

and 17 more of the most senior