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Company Law Reform Bill [HL]

moved Amendment No. A167:"Page 436, line 37, at end insert—" ““(1)   Section 425 of the Companies Act 1985 (c. 6) (power of company to compromise with creditors and members) is amended as follows. (2)   After subsection (1) insert— ““(1A)   On an application under subsection (1), the court may, on the application of the company or other person proposing the compromise or arrangement, determine the nature of the class or classes into which the creditors or members (as the case may be) are to be divided.”” (3)   In subsection (2) (arrangement or compromise to be binding) leave out ““majority in number”” and insert ““creditors or members””. (4)   After subsection (2) insert— ““(2A)   The court will have the power to sanction a compromise or arrangement under subsection (2) notwithstanding that any class has been wrongly constituted, subject to the court being satisfied that this has not materially affected the fairness of the compromise or arrangement.”””” The noble Lord said: This amendment has been tabled on the advice of the Law Society, and its purpose is to give the courts the power to determine the constitution of any class of members or creditors and to grant the courts the discretion to sanction a scheme of arrangement even if the relevant classes have not been formally constituted, provided that the fairness of the scheme is not materially affected. Also, to dispense with the requirement, the majority in number of the creditors or members must agree to a scheme of arrangement for it to be binding. Under common law the courts have no discretion to sanction a scheme of arrangement under Section 425, when classes of creditors or members have not been correctly constituted, even if this has no conceivable impact on the outcome. What often amounts to a technicality can create significant difficulties in practice. Chapter 4, paragraph 14 of a consultative document on company law reform, published in March 2005, proposed in line with the recommendations of the Company Law Review steering group that the Bill should grant the courts the discretion to determine what constitutes a class of creditors or members, and the jurisdiction to approve a scheme of arrangement, even when a class is wrongly constituted, when the court is satisfied that this has had no effect on the outcome. However, the Bill does not incorporate any clause with that effect and no justification for it is provided in the Explanatory Notes. The clause proposed here merely affects the proposed change, which would be of real practical benefit. Furthermore, the amendment to Section 425(2), proposed in subsection (3) above, removes the requirement for a majority of creditors or members to vote in favour of a scheme in order for it to be binding on all creditors or all members. This requirement is unnecessary, since approval of three-fourths in value of the creditors or members is required anyway. The additional limb is superfluous and in practice can result in a scheme being blocked, even when the holders of an overwhelming majority of the shares are in favour of it going ahead. This change was also recommended by the Company Law Review Steering Group and should now be implemented. I beg to move.