UK: England and Wales: schemes of arrangement and the meaning of 'creditors'

The Court of Appeal has delivered an important decision concerning schemes of arrangement under Part 26 of the Companies Act (2006). At issue in Re Lehman Brothers International (Europe) [2009] EWCA Civ 1161 was the meaning of 'creditors' within Section 895(1) of the 2006 Act. Section 895(1) provides that Part 26 applies "where a compromise or arrangement is proposed between a company and - (a) its creditors, or any class of them, or (b) its members, or any class of them".

The court held, in the absence of a statutory definition, that a creditor within Section 895 did not include a beneficiary of property held on trust by the company. Patten LJ, with whom the Master of the Rolls and Longmore LJ agreed, observed (at paras. [59] and [66]):

It is obvious that someone with a purely proprietary claim against the company is not its creditor in any conventional sense of that word. As a matter of ordinary language, a creditor is someone to whom money is owed. The use of this word with that meaning is a long-established and essential part of English company law ... Given that "creditor" is not defined in the legislation, it is inconceivable that Parliament should have used the word in the 2006 Act in any but its literal sense ... A person is the creditor of a company only in respect of debts or similar liabilities due to him from the company. I am not persuaded that Parliament can have intended to allow creditors to be compelled (if necessary) to give up not merely those contractual rights but also their entitlement to their own property held by the company on their behalf".

Update (10 November 2009): the ICLR, as part of its WLR Daily service, has provided a summary of the decision here.