Smile Telecoms – using a restructuring plan to compromise the rights of members of a foreign company

In our last blogpost (here) we reported how the court had, for the first time, 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 facts of this case are set out in more detail in that blogpost.        

The company proposing the restructuring plan in this case is Smile Telecoms Holdings Limited (Smile), which is incorporated in Mauritius. The case is relevant for another unprecedented feature. It provides the first indication to date that a UK restructuring plan could be used to compromise the rights of members (as well as creditors) of a company that is incorporated outside the UK (and therefore whose rights as shareholders are not governed by English law).

While definitive judgment on the question of jurisdiction was ultimately deferred to the sanction hearing (when the court will have had the benefit of expert evidence as to jurisdiction and recognition, as is customarily the case), the Court nonetheless heard detailed submissions on jurisdiction at the convening hearing, and provided interesting commentary in its judgment (delivered orally, with a written judgment to follow).

The court’s view 

While it was accepted that the English court had jurisdiction over the creditors in this case (the relevant facility and intercreditor agreements were governed by English law and there was at least a good arguable case that Smile’s COMI was in England), one creditor argued that the court lacked jurisdiction in relation to the member element of the restructuring plan.

They relied on the comment made in scheme of arrangement case of Re Drax Holdings Ltd [2004] 1 WLR 1049 that “it is almost impossible to envisage circumstances in which the English court could properly exercise jurisdiction in relation to a scheme of arrangement between a foreign company and its members, as this would essentially be a matter for the courts of the place of incorporation”.

The court here was not satisfied that the comments in Re Drax were sufficient to constitute a roadblock for the convening of the plan (although they could be argued again at sanction) because:

As submitted, by counsel, the particular comments in Drax concerned a solvent scheme of arrangement and may not be capable to be read across to a restructuring plan (where “financial difficulties” are an entry requirement).

Where a restructuring plan proposes to compromise the rights of both creditors and members, it is necessary to take a broader, more holistic view of the connections between the company and the plan jurisdiction (i.e. England).

Although Smile is incorporated in Mauritius, there is at least a good arguable case that it has its COMI in England. There is a close relationship between the test of sufficient connection and the question of effectiveness of a restructuring plan. The fact that the COMI is in England may well be highly material to the likelihood of the plan being effective and recognised in the place of Smile’s incorporation.

Smile’s shareholders themselves have not sought to challenge the convening order, nor have they taken the jurisdictional point. The only party to have done so was a creditor (to whom it should not matter).

Comment

• The case clears the path, subject to contrary findings upon further argument at the sanction hearing, for a UK restructuring plan to compromise the rights of creditors and members of a company incorporated outside the UK.
• It also suggests that case law in relation to solvent creditor schemes of arrangement (in which members are, by definition, still “in the money”), may not be of persuasive authority in the context of restructuring plans where the plan company is in financial distress with the relevant alternative likely being insolvency, the company’s members having no economic interest. Of course, at sanction, the court will want to see evidence that the restructuring plan is likely to be effective as a matter of the relevant applicable law.