UK: England and Wales: High court sanctions Lloyds ring-fencing scheme

Earlier this month, in Lloyds Bank Plc & Ors R(ring-fencing transfer scheme) (Rev 1) [2018] EWHC 1034 (Ch), Mr Justice Hildyard sanctioned the proposed ring-fencing transfer scheme for Lloyds Bank. This is the second time that the High Court in England and Wales has done so; the first was in March: Re Barclays Bank Plc And Woolwich Plan Managers Ltd, Re [2018] EWHC 472 (Ch), [2018] WLR(D) 158.

In this first decision the Chancellor noted various factors that ought to be taken into account by the court in exercising its discretion, one of which was:

The design of a ring-fencing transfer scheme is a matter for the board of the bank concerned. There may be many possible approaches to the design of a statutorily-compliant ring-fencing transfer scheme that will affect stakeholders differently. The choice is for the directors of the bank concerned, acting properly in accordance with their duty under section 172(1) of the Companies Act 2006 (which is to act in the way they consider, in good faith, would be most likely to promote the success of the company having regard to matters including those specified in that subsection)."

The Lloyds decision is of interest because Mr Justice Hildyard chose to add what he termed a "reservation" or "gloss" in respect of the courts' acceptance of the judgment of directors in proposing a particular scheme:

I accept that the court will give considerable latitude to commercial decisions of a board which has appeared properly to address the correct question and acted in accordance with its duties under statute and common law. I accept, more particularly, that where there are different designs of scheme, none of which leaves people materially adversely affected, or no more so than is reasonably necessary to achieve the ring-fencing purpose, the choice is for the promoters (and thus the directors) to make.

However, I would wish to emphasise that when the second part of the Statutory Question [see section 109A(4) of the Financial Services and Markets Act 2000] is being addressed, the question is not whether any adverse effect is greater than is reasonably necessary given the constraints of the particular scheme design, but whether that adverse effect is such as to be greater than reasonably necessary in order to achieve the statutory purpose. If the adverse effect appears material, and it appears likely that another scheme design would have avoided the adverse effect, that may call in question the scheme design chosen; and the court would not be required to accept the directors' choice (albeit that it would then also have to consider potential adverse effects of other designs). In other words, the greater the adverse effect, the more justified the scrutiny of the scheme design, and the less may be the readiness of the Court to accept the commercial judgment of the directors".