UK: Purposive Approach Taken To Decide How Undistributed Assets Under A Scheme Of Arrangement Should Be Treated

Last Updated: 8 April 2013
Article by Malti Shah

Key points

  • When asked for directions to resolve issues arising in relation to schemes of arrangement, courts can take a purposive approach taking into account the apparent aims of the scheme of a whole.
  • Pari passu treatment of creditors is a paramount concern in English insolvency.

The facts

In 2003, schemes of arrangement pursuant to section 425 of the Companies Act 1985 were sanctioned in respect of Marconi Corporation Plc ("Corp") and Marconi Plc ("Plc") under which the claims of all the creditors of Corp and Plc (with certain exceptions) were cancelled in consideration for distributions of assets ("Scheme Consideration") pro rata to creditors' claims. Somewhat unusually, all creditors voted in respect of each scheme as one class, despite their differing categorisation – for example, the most significant groups of creditors were lenders under bank facility agreements, bond holders (Eurobond and Yankee bonds) and intercompany creditors. The total potential claims which were extinguished under the schemes were valued at £5.2 billion in relation to Corp, and £4.7 billion in relation to Plc.

Several interim distributions of the Scheme Consideration were made over the course of almost 10 years. However, a comparatively small residue of the Scheme Consideration and accrued interest remained undistributed which was being held to the order of the bond trustees. As at 28 September 2012, the residue amounted to approximately £1.3 million and US$ 2.9 million. The terms of the schemes provided that before distribution could be made in respect of a bond holder's claim, an "Account Holder Letter" should be provided specifying a "Designated Recipient" including account details. In respect of a number of bond holders ("Residue Bond Holders"), no Account Holder Letter had been received at all or the Account Holder Letter submitted was either incomplete or contained incorrect details. Attempts had been made by the supervisors of the schemes over the years to contact the Residue Bond Holders to obtain complete Account Holder Letters. These attempts were not completely successful, meaning that distributions in respect of the remaining Residue Bond Holders claims could not be made, resulting in the residue being held.

The scheme documentation was not prescriptive as to how such residue should be treated, simply stating that the relevant part of the Scheme Consideration should be held to the order of the bond trustees with scant further guidance as to the directions the bond trustees could give. The scheme supervisors applied to court for directions as to how the residue should be distributed and several options were presented to the court. The application was unopposed, the bond trustees supporting the application and agreeing to be bound by the court's decision.


Mr Justice Henderson stated that in his view, the task of the court was to give directions which would promote the purpose of the schemes and which would enable the schemes to be completed without further delay. He therefore rejected the options of paying the residue (i) back to Corp and Plc for their own benefit, (ii) to the bond trustees for their own benefit, or (iii) to the Crown as bona vacantia. In addition, the court rejected the option of paying the residue into court to preserve the Residue Bond Holder's entitlement until such time as they came forward, on the basis that exhaustive attempts to contact the Residue Bond Holders had already been made.

The court ordered that the residue should be distributed amongst all creditors (as opposed to just among the identifiable bond holders) pari passu, as long as those creditors had complied with the necessary mechanics under the schemes. This decision was based on the fact that the concept of pari passu distribution runs through insolvency proceedings and furthermore the concept was expressly incorporated into the schemes in question, as all creditors had been treated as a single class for the purposes of sanctioning the schemes.


The scheme supervisors had expressed a preference for this option, and the bond trustees did not express a strong preference as between this option and the option of distributing pari passu to identifiable bond holders only. The question therefore arises as to whether the court would have taken a different approach had the bond trustees taken a contrary view.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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