This

appeal raises a question on the effect of a Scheme of Arrangement under section 99 of the Bermuda Companies

Act 1981, corresponding to section 425 of the U.K. Companies Act 1985. The relevant subsections read as follows:-

"(1) Where a compromise or arrangement is

proposed between a company and its creditors or any class of them or between a

company and its members or any class of them, the Court may, on the application

of the company or of any creditor or member of the company, or, in the case of

a company being wound up, of the liquidator, order a meeting of the creditors

or class of creditors, or of the members of the company or class of members, as

the case may be, to be summoned in such manner as the court directs.

(2)

If a majority in number representing three-fourths in value of the

creditors or class of creditors or members or class of members, as the case may

be, present and voting either in person or by proxy at the meeting, agree to

any compromise or arrangement, the compromise or arrangement shall if

sanctioned by the Court, be binding on all the creditors or the class of

creditors, or on the members or class of members, as the case may be, and also

on the company or, in the case of a company in the course of being wound up, on

the liquidator and contributories of the company.

(3) An order made under subsection (2) shall

have no effect until a copy of the order has been delivered to the Registrar

for registration, and a copy of every such order shall be annexed to every copy

of the memorandum of association of the company issued after the order has been

made."

1. On

21st June 1985 Mentor Insurance Limited ("Mentor") was ordered to be

wound up. Mr. Kempe and Mr. Nigel

Hamilton ("the liquidators") were appointed joint liquidators. They gave notice under Rule 73 of the Companies

(Winding-Up) Rules 1982 that proofs should be filed by 31st May 1989. On the basis of these proofs, they declared

an interim dividend of 25c in the dollar and paid out $78.2 million. Despite the deadline, creditors in a

liquidation are in principle entitled to file new or revised proofs at any time

before the assets are finally distributed, subject only to not disturbing

distributions which have already been made.

The liquidators took the view that if this rule was allowed to prevail,

the liquidation was likely to go on for many years. They therefore proposed a scheme of arrangement under section 99,

the principal feature of which was to impose a strict deadline for filing

claims, after which creditors would be altogether barred from participating in

the liquidation.

The Scheme defined a

"Scheme Claim" as any non-preferential claim provable in the

liquidation. It prescribed a

"Final Filing Deadline", which in the event was 30th June 1993 and

provided in clause 2.1.2 that:-

"No Scheme Claim

in respect of which a Claim Form has not been duly lodged shall be entitled to

rank for any dividend payable under the Scheme unless, on or before the Final

Filing Deadline, a Notice of Claim in respect of such Scheme Claim shall have

been submitted to the Joint Liquidators in accordance with clause 2.1.3."

2. Clause

2.1.3 prescribed a form of Notice of Claim and said that it "MUST, on or

before the Final Filing Deadline" be submitted to the Joint Liquidators.

3. Clause

2.2 dealt with the assessment of claims by the liquidators. By clause 2.2.1 they were to determine the

reasonableness of Scheme Claims and reject them to the extent which they

considered unreasonable. If they

rejected a claim, a written statement of the reasons was to be sent to the

creditor within 21 days of such rejection.

Section 2.3 dealt with appeals from the rejection of a claim by the

liquidators. The first two subclauses

read as follows:-

"2.3.1Any Scheme

Creditor which receives a written statement in accordance with clause 2.2.1 may

apply to the Court in the manner provided by the Rules for an order that any

decision of the Joint Liquidators relating to the assessment of that Scheme

Creditor's claim be reversed or varied, but only on the ground that such

decision was unreasonable. Such

application must be made by a summons filed with the Court within 21 days of

the Scheme Creditor receiving the written statement mentioned in clause 2.2.1.

...

2.3.2Save as provided

in the Scheme, no Scheme Creditor shall have any right to appeal any decision

of the Joint Liquidators relating to the assessment of Scheme Claims including,

for the avoidance of doubt, any right to apply to the Court under rule 77 of the

Rules."

4. Clause

2.4.1 dealt with Rejected Claims:-

"2.4.1Each Scheme

Creditor having a Scheme Claim or portion thereof which is rejected in whole or

in part by the Joint Liquidators pursuant to clause 2.2.1 shall, unless a

summons is filed in accordance with clause 2.3.1, have no further right to

participate in the Scheme, to the extent of the rejection."

5. Finally,

clause 8.1.1 provided that Mentor should continue to be a company in

liquidation and that "subject to the terms of the Scheme" the

liquidation should be governed by the principles and procedures applicable to

liquidations in Bermuda.

6. Ambassador

Insurance Company ("Ambassador") filed a Notice of Claim on 25th June

1993, within the Final Filing Deadline, in the sum of $1,158,140.27. The liquidators rejected all but $79,075.24

and delivered a written statement of reasons in accordance with clause 2.2.1 on

17th November 1994. The time for

appealing under clause 2.3.1 expired on 8th December 1994. Owing to an administrative lapse in its

offices, Ambassador did not file a summons until 16th December. The summons sought an order that the time

for appealing be enlarged pursuant to Rule 75 of the Companies (Winding-Up)

Rules 1982 or the inherent jurisdiction of the court.

7. Ground

J. held that neither Rule 75 nor the inherent jurisdiction had any application

to appeals under the scheme. He struck

out the summons on the ground that the court had no jurisdiction to entertain

it. The Court of Appeal reversed his

decision and enlarged the time for appealing.

Against this decision the liquidators appeal to Her Majesty in Council.

8. Rule

157 provides as follows:-

"The Court may, in

any case in which it shall see fit, extend or abridge the time appointed by

these Rules or fixed by any order of the Court for doing any act or taking any

proceeding."

9. The

time for appealing under clause 2.3.1 is plainly not "appointed by these

Rules". It is appointed by the

Scheme, even though it happens to be the same 21 day period as a creditor is

given under Rule 75 for applying to reverse or vary the decision of a

liquidator rejecting his proof in the liquidation. Mr. Crystal Q.C., who appeared for Ambassador, submitted that the

Rules should be regarded as operating alongside the Scheme. He gave two alternative reasons. One was that they had been incorporated in

the Scheme by the provision in clause 2.3.1 that the Scheme Creditor should

apply to the Court "in the manner provided by the Rules". The other was that the effect of clause

8.1.1 was to leave the Rules in operation except so far as expressly excluded.

An example of express exclusion was clause 2.3.2, which said that no Scheme

Creditor should have any right to apply to expunge another creditor's proof

under Rule 77. On the other hand, Rule

2.2.3 contemplated that the liquidator would have the right to invoke Rule 76

to apply to expunge the proof of a creditor which he considered to have been

improperly admitted.

10. Their

Lordships are unable to accept either of these arguments. The requirement that the application should

be "in the manner provided by the Rules" means only that the form of

application should be in accordance with the Rules. It cannot mean that the application should be treated as if it

was for all purposes an application to vary or reverse the decision of a

liquidator under Rule 75. Their

Lordships note that although clause 2.3.1 is based upon Rule 75, the period of

21 days prescribed by the Rule is expressly said to be "subject to the

power of the Court to extend the time". There are no such words in clause

2.3.1 and their Lordships consider that the omission must have been

deliberate. As for the other way in

which the argument has been put, their Lordships express no view on whether

there are provisions of the Rules which the Scheme has not excluded. But for the reasons already stated, they

consider that clause 2.3.1 deals exhaustively with the right of appeal and

cannot be assimilated to Rule 75.

11. Since

the period in clause 2.3.1 has not been "appointed by the Rules", the

next question is whether it has been "fixed by any order of the

Court". On the answer to this

question depends not only whether the Court can act under Rule 157 but also

whether it has inherent jurisdiction to do so, the latter being, as Lord

Denning M.R. said in R. v. Bloomsbury and Marylebone County Court, ex parte

Villerwest Ltd. [1976] 1 W.L.R. 362, 365, a power "to enlarge any time

which a judge has ordered". Is the

period of 21 days in clause 2.3.1 a time which was ordered by the Chief Justice

when he approved the Scheme? In the

Court of Appeal, Kempster J.A. thought that it was. He said that the clauses of the Scheme would have been

"without effect" but for the order of the Chief Justice giving the

sanction of the Court on 23rd March 1993 and the subsequent delivery of that

order to the Registrar. Although the

case was not cited to him, his view has the support of the decision of the

Supreme Court of Western Australia in Caratti v. Hillman [1974] W.A.R.

92. Jackson C.J. said at page 94 that

the scheme was "an integral part of the court's order" and Burt J.

said at page 95 that "the rights [under the Scheme] are ... in my opinion

created by the order and the procedure whereby those rights are to be

established or ascertained is a procedure which is also created by the

order". Accordingly, the court

could extend any period prescribed by the Scheme under its power to extend

periods fixed by its orders. The case has since been followed at first

instance

in

Australia and in Bond Corporation Holdings Ltd. v. State of Western

Australia (No. 2) (1992) W.A.R. 61 Anderson J. said at page 68 its

reasoning was that "once the order is made, it is the order, `speaking in

terms of the scheme' (per Burt J. in Caratti, p. 95) that has effect,

not the resolution of the creditors and not the statute".

12. Their

Lordships respectfully disagree. It is

true that the sanction of the court is necessary for the Scheme to become

binding and that it takes effect when the order expressing that sanction is

delivered to the Registrar. But this is

not enough to enable one to say that the court (rather than the liquidators who

proposed the scheme or the creditors who agreed to it) has by its order made

the scheme. It is rather like saying

that because Royal Assent is required for an Act of Parliament, a statute is an

expression of the Royal will. Under

section 99 it is for the liquidators to propose the scheme, for the creditors

by the necessary majority to agree to it and for the court to sanction it. It is the statute which gives binding force

to the Scheme when there has been a combination of these three acts, just as

the rules of the constitution give validity to acts duly passed by the Queen in

Parliament: see In re Garner's Motors [1937] Ch. 594, 598-599; Devi

v. People's Bank of Northern India Ltd. [1938] 4 All E.R. 337, 343.

13. It is

of course true that the sanction of the court is by no means a formality. Furthermore, in giving its sanction, the

court has an inherent jurisdiction to correct any obvious mistakes in the

document which sets out the scheme. But

it cannot alter the substance of the scheme and impose upon the creditors an

arrangement to which they did not agree.

The question of whether the time limits in the scheme are fixed or

flexible is in their Lordships' opinion one of substance. Mr. Crystal accepts that if there is

jurisdiction to enlarge the period for filing an appeal against the rejection

of a claim, there must also have been jurisdiction to extend the Final Filing

Date for filing the original claims.

But their Lordships think that this would have been a material

alteration, detracting from the certainty and expedition which were the chief

objects of the Scheme. If creditors

felt that in providing fixed time limits the Scheme was creating traps into

which the unwary might fall, the time to raise this question was when the

Scheme was under consideration or by way of objection when the Court was asked

to give its sanction.

14. Their

Lordships are therefore in full agreement with the careful judgment of Ground

J. They will humbly advise Her Majesty

to allow the appeal and restore his order striking out Ambassador's

summons. Ambassador must pay the

liquidators' costs in the Court of Appeal and before their Lordships' Board.