For the first time, the court has exercised its power under s. 901C(4) Companies Act 2006 to exclude a company’s members and all but one class of its creditors from voting on a restructuring plan under Part 26A. The court was satisfied that only one class of creditors had a genuine economic interest in the company and noted that “this was not a marginal case”.
Key drivers for the court’s decision (see more detail below) were:
- the detailed valuation and sales process which were interrogated in detail;
- the comparator report (on what would the outcome be in a distressed M&A process as set out in an estimated outcome statement); and
- adequate notice and opportunity for challenge.
The focus of today’s blog is the court’s use of the power in s. 901C(4) to exclude creditors and members from the vote. This case is also the first step on the path towards a potential first application of the UK restructuring plan to compromise the rights of members of a company that is incorporated outside the UK. We will return to this distinct question in a subsequent blog.
While the judge gave his reasons, at length, for granting the order sought by the company at its convening hearing, the written judgment of the court is to follow – this account is based on the judge’s oral reasons only.
Smile Telecoms Holdings Limited (Smile) is a company incorporated in Mauritius and the holding company of a group operating an internet and telecommunications business in Tanzania, Nigeria, Uganda and the Democratic Republic of the Congo.
The group suffered financial difficulties (including as a result of the devaluation of the Nigerian naira, competitor pressures and COVID-19) and in March 2021 a first restructuring plan was sanctioned by the English courts (the First Restructuring Plan). The First Restructuring Plan facilitated the injection of additional secured debt by Smile’s super senior lender, 966 CO S.à r.l. (966 and / or the Super Senior Lender) extending Smile’s runway to complete an M&A process, run by a financial adviser which also produced a desktop valuation of the Smile Nigeria business (the Valuation).
However, the First Restructuring Plan proved to be too optimistic and the sales process only resulted in non-binding offers in respect of parts of the group’s business. The existing super senior facility matured on 31 December 2021 (although a forbearance was agreed pending a restructuring), leaving Smile again facing an immediate cash flow issue, with insufficient funds to pay trade creditors or the matured facility, with its financial debts totalling just over US$400m in aggregate.
The current restructuring plan
The Valuation illustrated that the M&A process would return insufficient realisations to discharge the claims of the Super Senior Lender and Smile’s senior lenders (the Senior Lenders) in full. As such, a sale could only be achieved through an insolvency process or following a comprehensive balance sheet restructuring – to be implemented by this second restructuring plan (the Second Restructuring Plan).
In broad terms, the Second Restructuring Plan proposes to effect or facilitate:
- an additional liquidity injection from 966, to prevent an immediate administration of Smile;
- a transfer of the shares in Smile to 966;
- the discharge of Smile’s financial debt below the super senior liabilities in return for certain ex gratia payments; and
- the issuance of a contingent value rights instrument by Smile to 966 and to the Senior Lenders, in accordance with which any value realised above certain new money and super senior debt repayment thresholds, would be payable to 966 and Smile’s senior lenders.
Plan creditors – the default position
Under section 901C(3) Companies Act 2006, every creditor or member of the company whose rights are compromised by the restructuring plan must be permitted to participate in a meeting convened with the approval of the court. Were the Second Restructuring Plan to proceed on this basis, there would be eight separate classes of creditors and members voting on the plan, including 966, Smile’s senior lenders, various agents under the group’s facilities, the senior lenders, various classes of shareholder creditors, other creditors and contingent creditors of the group, as well as Smile’s ordinary shareholders.
Exclusion of classes with no genuine economic interest in the company
However, section 901C(4) permits a derogation from this general rule where the court “is satisfied that none of the members of [a] class has a genuine economic interest in the company”.
Smile applied to the court to convene a meeting of only one class: the Super Senior Lender, arguing that all lower-ranking creditors are “out of the money”, with no genuine economic interest in the company. This is the first time that this section has been invoked, although in Re Virgin Active  EWHC 1246 (Ch), the court provided some passing comments on this section.
Here, the court set out the following general considerations (among others) in relation to the application of s.901C(4):
- the court must consider whether a creditor / member / class has a genuine economic interest in the company, by reference to their position in the relevant alternative if the restructuring plan is not sanctioned, and should form its view based on the civil standard of the balance of probabilities; and
- the court may decline to exercise its discretion e.g. if it decides that that the evidence presented at the convening hearing is insufficient to form a decisive view, or that inadequate notice has been given to the creditors proposed to be excluded, for them to mount a proper challenge. On the other hand, if the court is satisfied, on the evidence, that none of the members of the relevant class has a genuine economic interest, and they have had adequate chance to challenge this position, the court may conclude that there is no purpose to be gained from requiring any meeting of that class.
Overall, the court agreed that the only class with genuine economic interest in Smile is the Super Senior Lender, and accordingly granted the order under s. 901C(4), excluding all other creditor and member classes from the vote. The court came to this conclusion on the basis of the following (among other points):
The Valuation and sales process
- The appointment of the valuers was accepted by the Super Senior Lenders and Senior Lenders.
- The Valuation, and the conduct of the sales process, were interrogated at length by the Senior Lenders and their advisers.
- The Valuation was provided to all parties to the restructuring plan, and all other interested parties, subject to signed confidentiality undertakings.
The Comparator Report
- Grant Thornton had been instructed to prepare a report (the Comparator Report) on likely creditor outcomes and asset recoveries in the relevant alternative to the restructuring plan.
- The estimated outcome statement (EOS) appended to the Comparator Report demonstrated that the Senior Lenders (and all lower ranking creditors) were clearly out of the money. In accepting this conclusion, the court noted that this does not appear to be a marginal case.
- The Comparator Report was provided to all parties to the restructuring plan, and early versions of the EOS had been provided to the Senior Lenders, giving all parties sufficient time to consider its findings.
- The only Senior Lender to suggest any disagreement with the findings of the Comparator Report and EOS had adduced no substantive evidence in support of their challenge.
- The court accepted the discount applied by Grant Thornton (recognised as qualified insolvency practitioners experienced in distressed sales) in assessing the likely asset recovery from a sale of assets in an insolvency, noting that it is normal for such a discount to be applied, e.g. to reflect the lack of warranties given by an officeholder.
- The Comparator Report used the Valuation as a starting point, which had been based on an actual M&A process, and which the court accepted provided the best evidence of the real value of the assets. All non-binding offers actually received were also lower than the lowest recovery case in the Comparator Report.
- The M&A process had been carried out by an experienced bank and monitored by Grant Thornton and (on behalf of the Senior Lenders) PwC.
Adequate notice and opportunity for challenge
- The court application in mid-December was supported by extensive and satisfactory financial evidence. All parties had a month’s notice prior to the hearing in January, with prior discussions taking place at least as early as November. The court was satisfied here that notice of a month was adequate to enable parties to decide whether to contest or oppose the application and to gather contrary evidence.
- The challenge made by one of the Senior Lenders that the M&A process should have proceeded as a share sale (as had been envisaged in the First Restructuring Plan) rather than an asset sale (as used in the Valuation and Comparator Report) was made late in the day. The court was satisfied that Smile had adequately answered the concerns, noting that the M&A process, which had not stipulated any particular structure, had only resulted in non-binding offers for an asset sale in any event.
Some key takeaways from the judgment as regards the application of s.901C(4) are:
- Sharpened focus on adequacy of disclosure and notice: before making an order under s. 901C(4), i.e. excluding a class of creditors or members from voting on a plan entirely, the court will want to be absolutely sure that all parties, in particular those who are to be excluded, have had ample opportunity to interrogate and challenge the evidence. This must, indeed, be right – as if a s.901C(4) order is granted at the convening hearing, this will be the only opportunity, prior to their exclusion, that the excluded creditors would be able to raise a challenge at court. The court took a great deal of comfort here that discussions and draft financial evidence had been shared as early as mid-November and that parties had therefore benefitted from up to two months to consider their position.
- A strategic balancing act: if an order under s.901C(4) is sought, disclosure of relevant documents will therefore need to take place at an earlier stage than might otherwise be the case (though the court had no issue with the company requiring signed confidentiality undertakings from creditors prior to disclosure). Given broader early disclosure and the impact of a s.901C(4) order, it is likely that the adequacy of notice will also be scrutinised more closely. Will the earlier disclosure of more financial evidence prior to convening (e.g. sharing EOS and valuations, and inviting lengthy creditor Q&A sessions) provide greater fuel for creditor challenge? Might it be “safer” for the company to proceed with several class meetings and rely on the court’s ability to use cross-class cramdown (noting that this, too, is discretionary)? Clearly, in Hurricane Energy  EWHC 1759 (Ch) the decision was taken not to utilise the exclusion power and instead proceed to full meetings and invoke cross class cram down (although the court was not prepared to sanction the plan in that case for other reasons). On the other hand, if early disclosure and ample notice are possible in the circumstances and provide creditors with sufficient information to challenge, with the court being satisfied to exclude multiple creditor classes from the vote, a restructuring plan may develop momentum as early as the convening stage that will be difficult to stop, giving confidence to the business and its other stakeholders.
- The court’s discretion: Section 901C(4) enables the court, if satisfied, to exclude a class of creditors or members from the vote: it does not mandate that where a class has no genuine economic interest in the company it must be excluded. Future cases will determine whether the court is prepared to convene several class meetings at the request of the company, in a situation where at least one party (e.g. the super senior lenders) argues that the other classes are out of the money and so should have no say in the matter from the outset. Much was made in submissions in this case of the fact that additional class meetings would serve no purpose. While it is true that the court will always be careful not to act in vain, it is possible that future courts may take the view that it would not be acting in vain by allowing multiple class meetings to be convened even if most classes are foreseeably crammed down in any event. This is because those creditors would at least have had more of a say by attending meetings, than not and they would have a further opportunity to make their case at the sanction hearing, perhaps with the benefit of additional time and disclosure.