Schemes of Arrangement and Asbestos Litigation: In Re Cape plc

Abstract

Schemes of arrangement under section 425 of the Companies Act 1985 have been criticised by Professor Goode as being 'complex and cumbersome. Other prominent academics have also noted that this complexity may have led to a poor uptake of section 425 schemes in the reorganisation of distressed companies.2 But the latest case in the asbestos litigation concerning Cape plc has demonstrated how well schemes of arrangement under section 425 may be integrated within an emerging philosophy of corporate rescue in English law.3 Although not currently insolvent, Cape plc was faced with a present and future liability of enormous and unknowable proportions from the claims of employees exposed to asbestos dust. Under the proposed scheme, a subsidiary, Cape Claims Services Ltd (CCS), would be created for the purposes of meeting the claims. The asbestos claims would in future be enforceable against CCS only. CCS would be funded by an initial payment of £40 million from Cape plc, and would receive continued funding from the parent company. This arrangement was necessitated by the 'great uncertainty as to the likely cost of future claims.'4 The scheme would be subject to revision, in order to take account of the expanding liabilities, and to calculate the future amount of funding required from Cape to meet those claims.5 In this way, Cape could meet current asbestos liabilities and hope to trade out of future difficulties. A crucial question before the court in In re Cape plc was whether the court could approve such an arrangement, which allowed the continued revision or variation of provisions affecting creditors bound by the scheme.6 Although a number of challenges were made, the court could see no prohibition of the orders sought by Cape plc, and accordingly approved the scheme. This comment proposes an interpretation of the Cape litigation as a fusion of the rival theories of Professor Thomas Jackson and Professor Donald Korobkin, who stand at the opposite ends of the debate over the proper normative content of