High Court Sanctions Link Fund Solutions Limited Scheme Despite Objections on Statutory Protections and Fairness

Citation: [2024] EWHC 250 (Ch)
Judgment on

Introduction

The High Court case involving Link Fund Solutions Limited ([2024] EWHC 250 (Ch)) concerns the sanctioning of a proposed scheme of arrangement under Part 26 of the Companies Act 2006. The case presents a variety of legal principles surrounding schemes of arrangement, statutory protections offered by the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS), and the informational requirements set forth for such schemes. This analysis aims to unpack the judgment delivered by Mr. Justice Richards, dissecting the reasoning behind the approval of the proposed scheme and examining the objections raised against it.

Key Facts

Link Fund Solutions Limited (LFSL) sought High Court approval for a scheme of arrangement in the context of significant financial claims arising from its role as the Authorised Corporate Director of the suspended LF Equity Income Fund. The scheme proposed to offer compensation to affected investors from a fund of up to £230 million or approximately 77% of the £298 million the FCA determined as the total loss suffered by investors.

The Financial Conduct Authority (FCA), along with various creditors and investor groups, raised objections to the scheme. Key objections centered on the alleged inadequacy of the explanatory statement, loss of access to FSCS and FOS, and potential injustices due to the lack of negotiation and the same treatment of all creditors irrespective of their individual circumstances.

The legal analysis revolved around several principles:

  1. Exercise of Court Discretion under Part 26 of the Companies Act 2006: The court’s discretion in sanctioning a scheme is broad and is guided by ensuring statutory requirements are met, the fairness of representation at the creditor meeting, the bona fide nature of the majority’s actions, and the absence of any “blot” on the scheme.

  2. Fair Representation and Majority Voting: The court evaluated whether the class of creditors was fairly represented and if the voting majority acted in good faith.

  3. Scheme Creditor Definition: The judgment considers the breadth of the term “creditor” within the Companies Act, confirming it extends to those with claims that might not typically be provable in liquidation.

  4. Statutory Protections and Scheme Releases: The court addressed whether statutory protections could be compromised, focusing on the scheme’s impact on rights under FSMA-related FSCS and FOS.

  5. Advice on Scheme Proposals: The Explanatory Statement must be clear, honest, and sufficient for creditors to make an informed decision, as required by Section 897 of the Companies Act.

  6. Information and Notification: Compliance with the directions given for notifying and informing creditors, as laid out in the court order convening the meeting, is imperative.

Outcomes

The court sanctioned the proposed scheme after examining the information presented and the voting outcomes from the creditor meeting. Justice Richards found that the required statutory majority had been met and that the objecting minority was not being oppressed. The explanatory statement was judged sufficient in content and clarity, despite criticisms. Furthermore, Justice Richards concluded that there was no “blot” on the scheme that would preclude sanctioning it, such as the loss of access to FSCS and FOS or the inclusion of broad release clauses.

Key aspects of the decision included the following:

  • The “subset argument” suggesting the FCA had not considered all possible breaches by LFSL was dismissed based on evidence that the FCA’s determination of the total amount of loss was comprehensive.
  • Scheme creditors’ loss of statutory rights to FOS and FSCS was a permissible consequence of the scheme, legally framed as a “compromise or arrangement.”
  • No concrete evidence was presented that the Contribution Reduction Mechanism made it practically difficult for creditors to pursue third-party claims, which was a significant concern.

Conclusion

The sanctioning of the Link Fund Solutions Limited scheme was rooted in a careful balance between protecting the interest of dissenting creditors and adhering to established legal and statutory requirements. No persuasive evidence or principle was presented that could preclude the sanctioning of the scheme. Justice Richards’ judgment reaffirms the robust application of the concepts intrinsic to Part 26 schemes while emphasizing the significance of creditor empowerment through informed decision-making. This case further underscores the courts’ tendency to respect the majority creditor decision when statutory requirements are met and no substantial “blots” are identified within the proposal.