On 30 March 2022, the English court sanctioned the most recent restructuring plan proposed by Smile Telecoms Holdings Limited (Smile). The Smile plan has raised novel issues in relation to the restructuring plan under Part 26A of the Companies Act 2006, such as the exclusion of a company’s members and all but one class of its creditors from voting on the plan (see our blog here) and the use of a plan to compromise the rights of members of a company that is incorporated outside of the UK (see our blog here).
By way of recap, Smile, a Mauritian holding company of a group operating an internet and telecommunications business in Africa, initially implemented a restructuring plan in March 2021 but faced further financial difficulties when unable to complete an anticipated sales process. As a result, Smile argued that it was likely to become cashflow insolvent upon the maturity of its senior facility at the end of 2021. Therefore, Smile proposed a second restructuring plan (the Restructuring Plan), in order to facilitate:
- the injection of further liquidity from its super senior lender, 966 CO S.a r.l. (the Super Senior Lender);
- a transfer of the shares in Smile to the Super Senior Lender;
- the discharge of Smile’s financial debt below the super senior liabilities in return for a small amount of consideration; and
- the issuance of a contingent value rights instrument by Smile to the Super Senior Lender.
The relatively short judgment (at 29 pages) raises many interesting points but in this blog we highlight the main takeaways:
- challenging a restructuring plan should be viewed as a piece of litigation: opponents of a plan will be required to seek disclosure of any financial information that may be required from the plan company in good time, file rival expert evidence with the court and bring a formal challenge in court, rather than “shouting from the spectators’ seats”;
- it is “tolerably clear” that the English court has jurisdiction to sanction a plan compromising shareholders in a foreign jurisdiction, but will generally be cautious to exercise its discretion to do so; and
- it now seems that where there is dissent, even if no-one is formally appearing to oppose, expert evidence from the company should be given as CPR Part 35 expert evidence.
Opposition to the Restructuring Plan
One of Smile’s senior lenders, the African Export-Import Bank (Afreximbank) indicated their opposition to the Restructuring Plan through a series of correspondence, although they did not attend the convening hearing or seek to appeal the convening judgment. Their opposition centred around valuation, with an alternative desktop valuation indicating that senior lenders were not out of the money, and therefore that the plan was not fair for Afreximbank or the other senior lenders. Despite their continued opposition set out in seemingly detailed correspondence, Afreximbank did not file evidence or appear at the sanction hearing.
The court was highly critical of the practice to oppose and challenge a plan or scheme without formally appearing at the hearing. In particular, the court considered it “unhelpful” in this case that a dissenting party who had sought to raise serious issues going to the fairness of the plan in correspondence, then purported to leave matters relating to the sanction of the plan to Smile’s directors and the court.
The judgment sends a clear message to those who wish to oppose a scheme of arrangement or restructuring plan based upon a dispute over valuation that they need to fully engage with the court process. The court held that it is not for the company to advance full argument against itself based on matters raised in correspondence. Nor is it the role of the court to conduct a detailed factual investigation into the merits of a company’s valuation evidence without any assistance – for example, through cross-examination of the company’s expert.
The court set out some clear guidance for those considering a challenge to a scheme or plan in the future. The creditor or member should:
- obtain any financial information from the company that may be required, either on a voluntary basis or through a timely (court) disclosure application;
- file their own expert evidence that is compliant with CPR 35, (possibly including the production of a joint expert report) and ensure the expert is made available for possible cross-examination;
- formally appear at the relevant hearing; and
- assist the court by addressing any arguments where appropriate at the relevant hearing.
While the judgment did offer the ‘carrot’ of reiterating the principle that creditors or members following the above guidance and advancing reasonable arguments may be able to recover their costs from the company even if their opposition is unsuccessful, it is clear that following such guidance bears significant expense and may be challenging to justify, especially for smaller creditors or members, or any parties that are simply not minded to commit the time and cost of pursuing a challenge in this way. It may assist proponent companies in seeing off opposition from out-of-the-money creditors who are raising weak points in order to gain leverage, but without fully particularising their grounds of opposition.
Compromising members in foreign jurisdictions
The court analysed four main questions in relation to the international recognition of the Restructuring Plan:
- Is there a sufficient connection to England to justify the sanctioning of the plan? The court recognised that “there can be little doubt that in the modern era the presence of a company’s COMI in England gives a legitimate basis for a finding of sufficient connection”. Similarly, the fact that the overwhelming majority of the debts to be compromised under the plan are governed by English law supported such a finding of sufficient connection.
- Is it appropriate for the English court to sanction a plan that will alter the constitution and share capital of a foreign company? The court noted that it was “tolerably clear” that it had jurisdiction to sanction a plan that alters the constitution and share capital of a foreign company. The more important question was whether it was appropriate for the court to exercise its jurisdiction. The court concluded that the absence here of a parallel scheme in Mauritius was not fatal. If the court can be satisfied on evidence that the necessary alterations to the constitution and share capital of an overseas company can be satisfactorily achieved in the overseas jurisdiction by an alternative process that is compliant with local laws and acceptable to the local courts without any need for a parallel scheme or plan, then the absence of such a parallel proceeding should not deter the English court from sanctioning the plan.
- Is the procedure provided in the plan to effect the changes in Mauritius achievable and effective? Instead of a parallel scheme, Smile was relying on a power of attorney, granted under the Plan to effect the changes to the company’s constitution. The court examined in detail how the procedure to implement the changes under the Plan will be acceptable and effective in Mauritius. The effectiveness of the procedure needs to be considered by reference to foreign law (evidenced by foreign law experts) and not English law. Here, the court was presented with expert evidence that a power of attorney would work and be recognised in Mauritius to change the company’s constitutional documents. The court was further reassured by the fact that the members were ‘out of the money’ and even if the power of attorney route was challenged, it was open to Smile to apply to the court in Mauritius for recognition of the plan under the UNCITRAL Model Law as enacted in Mauritius.
- Is the plan likely to be recognised and given effect against dissenting creditors in foreign jurisdictions? The court was satisfied, by foreign legal opinions that complied with the CPR, that courts in both Nigeria (under the principle of res judicata given that creditors had the opportunity to participate in the English Part 26A process) and South Africa would recognise the Plan (under the principle of comity).
The court made very clear that opinions from foreign law experts on recognition of the plan in other jurisdictions (and the mechanism of giving effect to a plan, such as a power of attorney) will need to comply with Part 35 of the Civil Procedure Rules, which deals with expert evidence in civil court proceedings. Indeed, the handing down of the judgment was delayed as the court asked for CPR-compliant confirmatory reports from each of the experts in relation to foreign law. In particular, the court was interested to ensure that the reports confirmed that the experts had understood and had complied with their overriding duty to the court. This is not just a question of form. It is fundamental to the relationship between the litigant and the expert. While it has been common for “experts” to state they have had regard to Part 35 requirements, it has been unusual for them formally to have that role. Parties should also recall that Part 35 evidence requires the permission of the court. While the need for Part 35 evidence was expressed in the context of opinions on foreign law, it remains to be seen whether courts will also expect this for valuation evidence.
For a short judgment, there is a surprising number of other legal nuggets in the judgment.
- It is clear that a power of attorney to effect releases under a plan or scheme works as a matter of English law. This is helpful confirmation - although not new.
- A scheme or plan needs to be a compromise or arrangement, not an expropriation of rights, and so some consideration must be provided in exchange for the release or cancellation of any rights. The court did not have to decide whether the principle is different where an entire class of creditors or members has been excluded – a question for another day.
- Is exclusion of a class at convening hearing stage also a matter of “class composition” and under scheme / plan case law therefore open to be revisited at sanction or is the convening hearing the only forum for these issues (and any related challenges)? The court noted this as an “open question”.
- Where the suite of documents in connection with the restructuring is of “fearsome complexity” and bundles are of inordinate length, it is for the law firm to confirm to the plan company that the documents indeed work – this is not the function of the court.
With every restructuring plan judgment the law in relation to Part 26A gets further cemented and will give parties more deal certainty - see, for example, the useful guidance provided in last week’s judgment sanctioning the restructuring plan of E D & F Man Holdings Limited (see our blog here).
This judgment follows a trend of treating restructuring proceedings as pieces of litigation, with the processes and expectations of the court that this entails. The clear reminder by the court that parties ought not to play a “tactical game of keeping their powder dry at the convening stage and only appearing to raise jurisdictional points at the sanction hearing” will be noted by many.
The consequences of the judgment should however not be underestimated, a call for a “proper” challenge based on disclosed financial information, with expert evidence, joint reports and possible cross examination brings a restructuring process such as a scheme or plan much more squarely into the field of litigation. This has not generally been the practice up to now and introduces lots of traps for the unwary. Courts in the future will also need to carefully tread the balance of how to incorporate as full and fair a litigation process as possible, where the company is operating from a burning platform – there may simply not be the time or the money to run the fully fledged process the court is outlining in this case – but that is something for another day.
Clearly, given the court’s unambiguous position on this, those parties considering instruct experts in restructuring proceedings should be looking to ensure at the outset that any potential experts are in a position to provide expert evidence that complies with CPR Part 35 and are instructed in a compliant way.
The judgment sends a clear message to those who wish to oppose a scheme of arrangement or restructuring plan based upon a dispute over valuation that they need to fully engage with the court process.