#16697 - Schemes Of Arrangement - Debt Restructuring

Partial Privatisation:

• Involves only scheme companies and scheme creditors:

  • The company can select the classes of creditors that the scheme will engage.

  • Scheme usually involve only in-the-money senior creditors.

  • Valuation is therefore extremely important.

APCOA:

• Senior secured facility agreement of 730 million:

  • Existing priority senior lenders:

    • Non-guaranteed lenders (Tranche and RCF) of 660 million;

    • Bank guarantee facility of 48 million; and

    • Interest and PIK interest of 15 million.

• Super senior unsecured facility agreement of 34 million.

• Turnover agreement: Consenting senior lenders to turn over to SSFA lenders any proceeds received until SSFA is paid in full.

• Nine interdependent schemes:
  

  • Senior lenders received new debt at the OpCo level + new debt at the HoldCo level.

  • The consenting senior lenders were also rewarded with equity at the HoldCo level.

• Voting:

  • Centre Bridge had acquired a majority stake in the senior debt under a loan- to-own strategy.

  • “Loan-to-own” strategy = Acquiring debt with a view to being converted into a majority shareholder under a restructuring.

  • Centre Bridge was therefore in favour of the scheme, but two other lenders opposed it.

Overview:

• Proposal of scheme between company and creditors.

• Application to the court to summon meetings.

• Convening hearings.

• Meetings of creditors in classes to vote.

• Sanction hearing.

• Order delivered to Registrar of Companies.

• No automatic stay or moratorium, although the court may impose a stay on the basis of the rules of the civil procedure on application of the debtor (Bluecrest).

Compromise or Arrangement?

• Some element of”give and take”.

• Not merely a surrender of (trust) property (Lehman).

  • The London-based investment bank of Lehman found themselves sitting on massive piles of client money.

  • Their recording system was however so bad that the assets and monies could not be attributed to their respective clients.

  • The liquidator sought to liquidate to pile of the assets and make a pro rata distribution to creditors based on the nominal value of their claims.

  • The problem is that the monies were actually held on trust. The court held that the scheme could not be used to surrender the trust monies.

  • Is this because there is only “giving” and no “taking”?

• The company must be party to the arrangement.

• The “give and take” may involve the release of third parties.

  • The creditor’s rights against the third party may be closely connected to its rights against the company in, say, guarantees.

  • Creditor benefits from the release.

“Company”:

• Any company liable to be wound up under the Insolvency Act 1986.

• Companies under the Companies Act 2006.

• Foreign companies, provided there is a sufficient connection.

  • The underlying documentation must be governed by English law.

  • Even if they were subsequently brought under the jurisdiction of English law.

Application to the court:

• For an order to summon meetings of creditors.

• This application can be made:

  • By the company;

  • By any creditor or member of the company; or

  • By the liquidator or administrator.

• The company itself must consent.

• Such consent can be given:

  • Through the liquidator or administrator;

  • The Board; or

  • The General Meeting.

Convening Hearing:

• Discretion to order meetings on terms as the court thins fit.

• Order will identify the chairman, time, and place of the meeting.

• Summons to be accompanied by an explanatory statement.

• The main issue: The formation of classes

  • Prior to 2001, the issue would be considered later at the sanctions hearing.

  • This wasted time and incurred expenses where the scheme was rejected on the very basis of the determination of classes.

Entitlement to vote:

• The legal owner, and not the beneficial owner, is the person that should be invited.

  • Voting arrangements that allow persons with economic interests to vote? Yes, this is possible (e.g. power of attorney).

• The company is free to decide with whom it will enter into the scheme:

  • Excluded creditors’ rights are unaffected;

  • Excluded creditors can still challenge the scheme at the sanctioning stage; and

  • The likelihood of success depends on whether or not they have an economic interest in the company

  • See Re Bluebrook.

Re Bluebrook:

• Three identical schemes.
  

• All the entities in red were put into administration so as to transfer their business and assets via pre-packs to a NewCo.

• Scheme creditors received equity in new HoldCo + new debt in new MidCO.

• Only the senior lenders, and not the mezzanine lenders, were invited to the scheme.

• At the sanctioning stage, the mezzanine challenged the scheme on the basis of the valuation assigned to the scheme companies.

Class Composition:

• Sovereign Life Assurance Co v Dodd: “Those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”.

• Re Hawk Insurance Co Ltd: There must be an “analysis (1) of the rights which are to be released or varied under the scheme and (2) the new rights (if any) which the scheme gives, by way of compromise or arrangement, to those whose rights are to be released or varied”

• The more classes = The more veto rights, since there is no cross-class cramdown.

• Rights, and not interests, are relevant.

• Interests may be taken into account at the sanctioning stage.

• The court will take a practical, commonsense approach.

  • McCarthy & Stone: Minor differences in interests rates deemed irrelevant.

• Correct comparator for creditors’ rights:

  • Insolvent company = Rights on winding up.

  • Solvent companies = Rights on a going concern basis.

• Insolvent companies = Rights on winding up

  • Senior secured creditors;

    • Differentiate between those with fixed security; and

    • Those with floating security.

  • Senior unsecured creditors;

  • Second lien creditors;

  • Mezzanine creditors;

  • Ordinary unsecured creditors, including contingent creditors; and

  • Subordinated creditors.

• Class composition in APCOA:

  • Turnover agreement: Subordination of consenting lenders subordinated to SSFA lenders.

  • Perpetuated through a lock-up agreement.

  • Should FMS and Litespeed form a separate class because they are not so subordinated?

    • N.b. These were “bad banks” whose mandates were to liquidate and not to continuing trading with their portfolio companies.

  • Held:

    • Neither agreement actually altered the creditors’ rights.

    • 2.7 million as the alternative advantage.

    • The advantage from restructuring is potentially much higher.

    • Their interests were reasonably similar so as to unite them under a common cause.

• The question: Are the rights sufficient similar to form one and the same class?

Class Meetings:

• No quorum.

• Non-voting creditors are excluded from the calculation.

• Threshold = 75% in value + Half in number.

• “Half in number” = Minority protection, because one single creditor holding a huge amount of debt cannot impose its wishes on the remaining creditors.

  • But this protection is easily circumvented by splitting and assigning claims.

• The potential for holdouts:

The second application to court:

• For an order to approve the scheme.

• This order can be made:

  • By the company;

  • By any creditor or member; or

  • By the liquidator or administrator.

Sanctions Hearing:

• The court will adopt a two-step process.

  • Does the court have jurisdiction to sanction the scheme?

    • Is the scheme within the proper scope of Part 26 of the Companies Act 2006?

    • Have the relevant statutory provisions been complied with?

  • Should the court exercise its discretion to sanction the scheme?

• The proper scope of Part 26:

  • (1) Company liable to be wound up under the Insolvency Act 1986.

  • (2) “Compromise” and “arrangement” = “Give and take”.

  • APCOA:

    • New guarantee facility to replacing the existing facility. Problem: There is no “give and take” here.

    • New obligation.

    • No variation of existing creditors’ rights.

    • The solution = Sanction only after amendment, making the facility elective.

• Compliance with statute:

  • Adequate explanatory statement.

  • Resolutions are passed with statutory majority in each class.

  • No cramdown of dissenting classes.

  • The court cannot overcome or cure technical defects; the defective document must be redone.

• Exercise of discretion:

  • “The majority has been acting bona fide.”

  • “The minority is not being overriden by the majority having interests of its own clashing with those of the minority who they seek to coerce.”

  • The scheme is “on as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by business men.”

  • I.e. The court is not asking if this is the best scheme there is , or if there are better schemes out there. It is simply asking if an experienced businessman would reasonably have approved the scheme.

  • Great weight given to the majority vote.

  • Votes cast in order to promote a special interest of some members that is not shared by the class = Unrepresentative.

    • I.e. If the majority was reached only be including creditors that were subsidiaries of the company. This is especially crucial in cases of intra- group debt.

    • This may lead the court to conclude that they should not exercise their discretion to sanction the proposed scheme.

  • Non-voting creditors may object to the scheme.

    • But they will be unsuccessful if they have no economic...