The limits of the scheme of arrangement jurisdiction (Re Instant Cash Loans)

What are the practical implications of this case?

Any attempt to effect a surrender of a company’s leases via a scheme of arrangement (or, by extension, a company voluntary arrangement under Part 1 of the Insolvency Act 1986 (a CVA)) will need to be approached with caution. While Zacaroli J made clear that his judgment merely reflected the application of established principles to the facts of this particular case, he nevertheless held that the terms of the ICL scheme imposed an additional obligation on landlords by forcing them to accept an early surrender of the leases held by ICL as well as foregoing their pecuniary claims against the company.

The judge found that, since it was possible for ICL to compromise its liabilities under its lease covenants without also giving up possession of its stores, requiring landlord to accept a surrender of the lease could not be considered ‘necessary’ to give effect to the arrangement between ICL and its creditors. Whether Zacaroli J was right to adopt such a restrictive approach to this question will doubtless prompt further debate and is likely to be tested before the courts before too long. In the meantime, the question of what releases form a ‘necessary’ part of a scheme or CVA will require careful analysis by the company in question—though to a great extent that merely reflects the existing approach of both solicitors and counsel practicing in this area.

What was the background?

ICL had previously provided a range of FCA regulated consumer finance products and services, including pawn-broking and high-cost, short term lending. Although the company was no longer carrying on new business and had either closed or sold all of it stores, it faced significant increase in consumer complaints relating to irresponsible lending practices which, if upheld, resulted in compensation payments being made to consumers consisting of a refund of all interest paid plus 8% interest thereon. Similar complaints were also made against a number of ICL’s subsidiaries, which ICL had assumed responsibility for administering and paying. It was estimated that as many as 2m customers may be entitled to present such complaints.

Given its increasingly precarious financial position, ICL decided to implement a scheme with its creditors in order to compromise—(i) its mis-selling liabilities and those of its subsidiaries, and (ii) its liabilities to landlords and other non-customer creditors. ICL’s shareholder agreed to provide a fund of approximately £20m to satisfy mis-selling liabilities and associated costs, while the company would realise its assets for distribution to its other creditors in satisfaction of their claims. As part of the realisation process it was intended that the scheme would effect the early surrender of all of ICL’s remaining leases, save for that in respect of its head office. While timing pressures meant that it was not possible to go through the process of obtaining the FCA’s formal non-objection, both the FCA and the Financial Ombudsman Service were consulted throughout.

What did the court decide?

At the convening hearing, Zacaroli J expressed some doubt as to whether effecting the early surrender of ICL’s leases was a permissible use of the scheme jurisdiction. It was therefore necessary for ICL to draft the scheme document with sufficient flexibility to permit it to be amended depending on the court’s final determination of this issue.

At the sanction hearing, Zacaroli J held that the scheme jurisdiction extends to releases of contractual rights or rights of action necessary in order to give effect to the arrangement between the company and its creditors. It is therefore within the scope of the scheme jurisdiction to impose a term on a landlord requiring early surrender to the extent that such term meets this test. This was (and is) uncontroversial and consistent with the Court of Appeal decision in Re Lehman Brothers International Europe [2010] 1 BCLC 496 and the judgment of Snowden J in Re Noble Group [2019] 2 BCLC 548.

However, the judge went on to find that it was not necessary for the leases to be surrendered in order to give effect to the debt compromise sought to be achieved by the scheme, and therefore that the provisions of the ICL scheme seeking to compel the early surrender of leases fell outside the scope of the jurisdiction contained in CA 2006, Pt 26. Broadly speaking, his reasoning was that:

• surrender requires the landlord’s consent (at para [11])  

• surrender changes the nature of the landlord’s interest in the property and liabilities may be imposed on the landlord as a result (at paras [10], [12],13])  

• a scheme can only compromise the rights of a company and its creditors in their respective capacities as such, and may only stray beyond these limits in order to ensure that a compromise of a debt is fully effective, or where the contractual right is ancillary to or parasitic on the debt (at paras [22] and [23]), and  

• a compelled surrender was not jurisdictionally permissible under the ICL scheme because it was not necessary for ICL’s leases to be surrendered in order for the compromise of its pecuniary liabilities under those leases to be effective (at paras [13], [24] and 25])

Since the scheme allowed for the excision of the provisions compelling early surrender, and that possibility had been publicised to scheme creditors, Zacaroli J held that he was able to sanction the scheme with the relevant clauses removed. The result was that ICL remained in possession of its stores and it was up to each landlord to agree a surrender if it so desired.

Case details

• Court: High Court, (ChD) 

• Judge: Mr Justice Zacaroli  

• Date of judgment: 8 October 2019