Power to exclude creditors used for first time in Part 26A scheme

A Part 26A application was made by a company incorporated in Mauritius. The Part 26A scheme proposed the injection of additional liquidity by the super senior secured creditor in return for 100% ownership of the company and a release of other liabilities.

At the convening hearing, the company contended that the super senior creditor was the only participant in the scheme with a genuine economic interest in the company and applied for an order pursuant to section 901C(4) that only a single meeting of that class needed to be convened.

In the convening hearing judgment, the judge held that, in considering whether a creditor or member has a genuine economic interest in the company, the court should consider the position by reference to the relevant alternative for the company if the plan is not sanctioned. The judge went on to consider the valuation evidence and held that it was appropriate to order a single meeting of the super senior creditor only to vote on the scheme.

The super senior creditor subsequently voted in favour of the scheme. A creditor subsequently sent a letter to the company raising a number of objections to the scheme including in relation to valuation. The company submitted further evidence in relation to valuation and to the other points made in the letter and the scheme returned to court for the court to consider whether to sanction the scheme.

At the sanction hearing, the judge held:

  • If a plan company has given proper notice of the convening hearing and of its intention to seek an order under section 901C(4), if those affected have had a proper opportunity to adduce evidence in opposition to such an order, if the court has been satisfied by the evidence adduced at the convening stage and there has been no material change of circumstance, the court should not, absent some good reason, be required to conduct that evidential exercise again at the sanction hearing. In the instant case, not only did the creditor not appear at the sanction hearing but it gave no reason (still less a good reason) why it could not.
  • In the case of a Part 26 scheme, a scheme which purports to effect an expropriation of rights of some creditors or members without compensating advantage will not satisfy the requirement that the scheme be a "compromise or arrangement". The point about expropriation of rights without compensating advantage potentially arose in the instant case because the instant scheme provided only minimal compensation ($10,000 to share between them) for the other creditors and the existing shareholders. However, given the conclusion above that all such creditors and members would be "out of the money" in the event of the relevant alternative, even this relatively small payment was sufficient to satisfy this test.
  • On the issue of jurisdiction, the question was whether the fact that the scheme involved an alteration to the constitution and share capital of an overseas company and its members without there being a parallel scheme for the company in Mauritius ought, as a matter of principle, to cause the court to decline to exercise the jurisdiction to sanction the scheme. The court held that it should not, reasoning that, the use of a parallel scheme is an aspect of ensuring the international effectiveness of the English proceedings, rather than a strict legal requirement. Accordingly, if, as here, the court can be satisfied that the necessary alterations to the constitution and share capital can be satisfactorily achieved in the overseas jurisdiction by an alternative means that is compliant with local laws without any need for a parallel scheme, then the scheme can be sanctioned.

In re Smile Telecoms Holdings Ltd, convening hearing, 12 January 2022; sanction hearing, 30 March 2022

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