PETITION OF PREMIER OIL PLC AND PREMIER OIL UK LTD FOR SANCTION OF SCHEMES OD ARRANGEMENT [2020] ScotCS CSOH_39 (29 April 2020)

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Cite as: 2020 GWD 15-216, [2020] ScotCS CSOH_39, [2020] CSOH 39

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OUTER HOUSE, COURT OF SESSION
P28/20 & P29/20
OPINION OF LADY WOLFFE
[2020] CSOH 39
in the petitions of
PREMIER OIL PLC and PREMIER OIL UK LIMITED
Petitioners
for sanction of Schemes of Arrangement
Petitioners: Delibegović-Broome QC, van der Westhuizen; CMS Cameron McKenna Nabarro
Olswang
First Respondent: Lord Davidson of Glen Clova QC, Macgregor; Dickson Minto
Second and Third Respondents: Borland QC; Burness Paull LLP
29 April 2020
Introduction
The parties
The petitioner and the Group
[1]       By these two applications Premier Oil plc (“PO”) and Premier Oil UK Limited
(POUK”), respectively a public and a private company registered in Scotland, each seek
sanction under part 26 of the Companies Act 2006 (respectively “Part 26” and “the 2006
Act”) for a scheme of arrangement (“the Schemes”). POUK is the principal operating
member of the group of companies (“the Group” (also referred to in some of the
documentation as “the Scheme Companies”)) of which PO is the parent company. (PO is
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2
the guarantor of all of the Scheme Debt Facilities (as after defined) apart from the Retail
Bonds (as after defined), which are guaranteed by POUK.) The Group comprises
63 companies in total and it carries on oil exploration and production operations throughout
the world. As at the date of these applications, PO’s issued share capital amounted to
£104,684,823.
[2]       The proposed PO scheme and POUK scheme are on the same terms and each scheme
has the same Scheme Creditors. While these applications were not formally conjoined, for
ease of reference I shall refer to PO and POUK as “the petitioners” and to the Schemes
without differentiation.
The first respondents: the single opposing creditor group
[3]       The first respondent, Fund III Investment 1 (Cayman) Limited, is the only creditor to
lodge answers in opposition to the Schemes. The first respondent is part of a group of
entities collectively described in its answers as the Asia Research and Capital Management
Ltd Group (“ARCM”). As at the Record Time (being 5 pm on 10 February 2020), the funds
ARCM controlled totalled approximately 15% (or approximately US $428 million) (by value)
of total commitments under The Group’s indebtedness (“the Scheme Debt Facilities”),
although the first respondent itself only holds approximately US $85 million of
commitments under the Scheme Debt Facilities. ARCM are the largest single creditor of the
Petitioners. Their debt falls within several creditor classes as defined by the nature of the
debt instruments (explained below).
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The second and third respondents: the compearing supporting creditors
[4]       The second and third respondents are two separate groups of creditors, referred to
for the sake of commercial confidentiality as “the Allen & Overy Creditor Groupand the
Ad Hoc Creditor Group(collectively, the Supporting Creditors”).
[5]       The Allen & Overy Creditor Group comprises creditors of the Group presently
holding principal commitments amounting to approximately US $175 million and
£100 million (as at the Record Date) which, in turn, are co-ordinating creditors of the
Group presently holding principal commitments which amount to approximately
US $915 million and £4 million. The Ad Hoc Creditor Group is made up of creditors of the
Group which between them presently hold scheme claims as at the Record Date amounting
to approximately US $935 million. The Supporting Creditors, who are said to represent
83.59% of the Super Senior Creditors and 75.4% of the Senior Creditors in value, support the
petitioners and the petitioners’ motion for sanction of the Schemes.
[6]       The petitioners proposed two classes of creditors (referred to collectively as “the
Scheme Creditors”): (1) the Super Senior Creditors(who were secured creditors); and (2)
the Senior Creditors(comprising essentially all the other private creditors and the Retail
Bond holders). These two classes of creditors met and approved the Schemes. In respect of
the approval of the Schemes at the class meetings, the petitioners make the following points:
first, that, with exception of the ARCM-controlled funds, the Schemes were approved by
approximately 99% in value of the Super Senior Creditors and Senior Creditors who cast a
vote; secondly, that the turnout was very high, with 96.82% of the Senior Creditors and
99.81% of the Super Senior Creditors (in value) being represented in person or by proxy at
the Meetings; and thirdly, that while a small number of Scheme Creditors voted against the
Schemes at the Meetings, they do not seek to oppose the sanctioning of the Schemes.
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Background
The Group’s capital structure (“the 2017 Refinancing”)
[7]       The Group’s current capital structure was put in place following earlier schemes of
arrangement sanctioned by this Court in 2017 (“the 2017 Schemes”). The 2017 Schemes
played a key part in the overall refinancing of the Group in 2017 (“the 2017 Refinancing”).
The two key documents of the 2017 Refinancing were the Intercreditor Agreementand
“the 2017 Override Agreement”. The 2017 Override Agreement provided for a common set
of voting rights, covenants and events of default for the Scheme Liabilities. The Scheme
Liabilities are secured by a common security package. The 2017 Override Agreement
provided also that the Scheme Liabilities have a single contractual maturity date of 31 May
2021 (“the Scheme Maturity Date”) (referred to in some of the documentation as the 2021
Maturity”). If the Schemes are sanctioned these documents will be amended.
[8]       Significant features of the 2017 Refinancing should be noted, as follows.
Creditor classes
[9]       Under the 2017 Override Agreement there were 7 creditor classes corresponding to
the debt instruments. (These are detailed in the petitioners’ Note on Class for the Reporter,
dated 21 February 2020 and in para 3.8 of Part A of the Explanatory Statement.) Mention
need be made of three creditor classes:
1) The Converted Group: The Converted Group emerged as follows. At the time
of the 2017 Schemes ARCM held certain German debt instruments (“the
Schuldschein debts”). In order to bring those debts within the jurisdiction of
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the English courts and the 2017 Schemes, ARCM agreed to convert these into
a debt instrument recognised in English law.
2) RCFs: Some creditors (including ARCM and the first respondent) provided
revolving credit facilities (“RCFs”). The first respondent’s “new obligation”
argument (see below) relates to the undrawn amount under its RCF.
3) The Retail Bonds: The Retail Bonds are the only publically traded debt. All
other creditors apart from the Retail Bond holders are referred to as “the
Private Creditors.”
Super Senior Creditors and Senior Creditors
[10]       The Intercreditor Agreement governed the ranking of the Scheme Debt Facilities and
it provided that the Super Senior Creditors ranked ahead of the Senior Creditors for all
purposes (clause 2); otherwise, the Senior Creditors ranked pari passu without any
preference between them” (clause 2.1(b) an 2.2(b)). The Super Senior Creditors’ debt
instruments were the RCF facilities and the Term Loan facilities. There are also RCFs and
Term Loan facilities that are held by the Senior Creditors. The remaining creditors (ie the
Senior Creditors as well as Retail Bondholders) are unsecured.
Voting rights
[11]       Clause 23 of the 2017 Override Agreement contained complex provisions for making
amendments and granting waivers. There were a number of different categories of
amendments and waivers, each with different consent thresholds. Some categories required
unanimous or near-unanimous consent of the creditors; others required significant
majorities of, for example, 75%. Accordingly, in respect of categories of amendments and
waivers requiring unanimity, any creditor opposed had a blocking vote or de facto veto. In
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respect of waiver of a Material Covenant (as provided for in clause 23.2), which included a
prohibition on entering into any sale or purchase agreement, the percentage of the debt
instrument held by ARCM in two creditor classes gave it a de facto veto in respect of this
form of waiver. In particular, clause 23.2 required that any change or waiver which affected
or related to Clauses 10 (Representations and Warranties) and to 16 (Defaults), could only be
made or given with the consent of the Majority Creditors (as defined) and at least three of
the RCF Group, the Term Loan Group, the Converted Group, the USPP Group and the
Retail Bond Group. By late 2019 ARCM was the Group’s largest single creditor. It had a
total of 15% of the Group’s debt - it is disputed whether this was accumulated incrementally
since 2017 (the petitioners’ understanding) or was held by ARCM at that time (ARCM’s
position). ARCM’s holding gives it a de facto blocking vote within two of the creditor classes,
namely, the Converted Group and the Term Loan Facilities. (Indeed, the Petition narrates
that, by reason of the Group’s inability to agree proposals voluntarily across all creditor
classes, it was compelled to promote the Schemes.)
[12]       In clause 23 of the proposed Override Agreement, the voting structure will be
simplified: instead of majorities within each of the creditor classes (as defined by debt
instrument), majorities will be required from two principal groups, namely the Retail
Bondholders and the Private Creditors (ie comprising all of the other classes of creditors
apart from the Retail Bondholders). The effect of this would be the loss of ARCM’s blocking
vote. As will be seen, ARCM challenge this as an impermissible confiscation of their voting
rights.
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The “debt wall”
[13]       One consequence of the 2017 Refinancing was the harmonisation and postponement
of the maturity date of the Group’s indebtedness to a single date, namely, the Scheme
Maturity Date of 31 May 2021.
[14]       The liabilities owing to the Scheme Creditors amount to about US $2.56 billion. The
total lending commitments are higher, at US $ 2.83 billion (ie “Scheme Debt Facilities”), the
difference in the two figures is the extent to which the Scheme Debt Facilities are as yet
undrawn. In the discussions among the Group and its creditors prior to the promotion of
the Scheme, this was referred to as a “debt wall” (a phrase understood to have been coined
by ARCM). It was accepted at that time (though not by ARCM in these proceedings), that in
the absence of a further debt extension as part of the Scheme or of forbearance on the part of
the Group’s creditors, refinancing of this magnitude of debt at a single point in time
presented very significant challenges.
The two creditor classes for the Schemes
[15]       The petitioners observe that, notwithstanding the identification of seven categories of
debt instruments within the 2017 Override Agreement, the 2017 Scheme itself was approved
at a meeting of two creditors classes, namely, the Super Senior Creditors and the Senior
Creditors, and that ARCM did not object to the composition of these two creditor classes at
that time. Consistent with the petitioners’ approach to the 2017 Schemes, the petitioners
divided the Scheme Creditors into the same two classes for the creditors’ meetings to vote
on the Schemes. (As will be seen, one of ARCM’s challenges is to class composition.)
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The impetus for the Schemes: the challenge of refinancing the Scheme Debt Facilities
[16]       The Group issued a statement, as required by section 897 of the 2006 Act, setting out
the proposed Schemes (“the Explanatory Statement”). Part A of the Explanatory Statement,
which takes the form of a letter from the directors of the Group, sets out in detail the
background to the Proposed Transactions, the iterative process by which its several elements
were developed and the benefits and risks of what is proposed. The fundamental driver is
the Group’s position that it is at present unable to refinance the Group’s indebtedness and
that, absent the Schemes, it will be unlikely to be able to refinance its indebtedness in full by
the Scheme Maturity Date.
[17]       While a common method of refinancing for a company in the Groups sector would
be reserve based lending (“RBL”) facility (a form of lending against existing and anticipated
yields of oil- and gas-producing assets), coupled with a subordinated public debts
instrument, the Group would currently be able to obtain an RBL facility for only part of its
debt. (This basis for this view is a report from PWC (“the PWC Report”).) ARCM challenge
the assumptions in the PWC Report and also criticise the lack of a further or independent
report to support this view. Furthermore, it is the view of the directors that the Group is
unlikely to be able to obtain sufficient subordinated debt to repay the balance of the Scheme
Debt Facilities. The directors do not believe that a partial refinancing is feasible.
The Proposed Transaction
[18]       The Schemes seek to enable a complex transaction (“the Proposed Transaction”) to be
carried out for the purposes inter alia of extending the maturity date of the Group’s debt
(the Credit Facilities Extension) from 31 May 2021 (ie, the Scheme Maturity Date) to
30 November 2023, and to improve the ability of the petitioners to fund ongoing activities.
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The Schemes are not seen as achieving the resolution of the Group’s financial challenges (in
the sense of deleveraging the balance sheet), but are intended to improve the Group’s
financial position and to enhance the ability of the Group to execute a future refinancing of
the Scheme Debt Facilities. In part, this is sought to be achieved by adding to the Group’s
debt capacity under RBL. The Schemes are also intended to avoid hitting the debt wall; that
is, to avoid what the directors of the Group regard as a very substantial risk that the Group
will not otherwise be able to refinance the Scheme Debt Facilities before the Scheme
Maturity Date.
[19]       In outline, the essential elements of the Proposed Transaction, include:
1) The Acquisitions: The proposed acquisition (putting it simply) of one or more
of three proposed material acquisitions of oil- or gas-producing assets (the
Andrewand Shearwater” acquisitions), or of a part-interest in such an
asset (the Tolmount” acquisition) (collectively, “the Acquisitions”). The sale
and purchase agreements relative to the Acquisitions are in escrow and will
only be released and take effect subject to completion of other elements of the
Schemes. It should be noted that the Schemes will not themselves give effect
to the Acquisitions. The Acquisitions essentially involve a transaction
between PO and the relevant vendors (to purchase the assets comprising the
Acquisitions), and a transaction between PO and its shareholders and other
investors (to raise new equity capital to finance the purchase price). The
Schemes simply provide the necessary consents by the Scheme Creditors in
respect of any contractual restriction (eg in the 2017 Override Agreement)
that would otherwise prevent the Acquisitions.
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2) The equity raise: The Acquisitions are funded by, and therefore conditional on,
the Placing and Rights Issue to raise US $500 million (net of expenses) (“the
Placing and Rights Issue”), which is at present fully underwritten; and
3) Extension of the Scheme Maturity Date: The extension of the Scheme Maturity
Date is dependent on the equity raise and on either the Andrew or Tolmount
Acquisition completing.
There will also be ancillary amendments to the 2017 Override Agreement and other
documentation associated with the 2017 Refinancing. The Group’s directors believe that the
Acquisitions and related funding arrangements are in the best interests of the Group and the
Scheme Creditors. It should be noted that the Scheme Creditors are not being required to
advance any new money to finance the Acquisitions. The burden of financing the
Acquisitions will be borne by PO’s shareholders and the new equity capital provided by the
new investors (subject to completion of the Placing and Rights Issue).
[20]       If granted, the Schemes will authorise PO as an attorney (on behalf of the Scheme
Creditors) to sign a number of deeds, including one described as the Implementation
Deed. Among the matters the Implementation Deed provides for are (i) the extension of
the Scheme Credit Facilities, (ii) conditional consent to the Acquisitions and related
financing arrangements (including the Placing and Rights Issue and the Acquisition Bridge
Facility), (iii) a waiver of all breaches of the finance documents which may occur consequent
upon the Proposed Transaction, and (iv) certain releases.
[21]       As will be seen, ARCM challenges the mechanism of constituting PO an attorney to
execute certain documentation on behalf of the Scheme Creditors (“the power of attorney
issue”) and it challenges the conditionality of the Scheme.
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Urgency of the Schemes
[22]       The petitioners stress the urgency of sanction of the Schemes. They cite several
factors, including:
(1) The consequence of the Scheme Debt Facilities becoming current liabilities: First, the
Scheme Debt Facilities will become current in June 2020. In other words, if
the Scheme Debt Facilities are not refinanced before 30 June 2020, they would
require to be reclassified as current liabilities under International Accounting
Standard 1 in the Group’s half-yearly statements for the 30 June 2020
reporting period. By reason of the magnitude of the Group’s indebtedness,
coupled with the fact that these facilities all fall due on the same date (the
“Scheme Maturity Date”), and that (in the absence of the Schemes or at least
in the absence of an amendment and extension (“A&E”) of the Scheme
Maturity Date) there is no prospect of repayment in full as at the Scheme
Maturity Date, it can reasonably be anticipated that the Group’s auditors will
interrogate these circumstances, and which may lead to an adverse market
perception of the Group’s financial prospects;
(2) The escrow purchase agreements for the Acquisitions: The Acquisitions are also
time-critical. While the Group has concluded agreements for the
Acquisitions, these are in escrow. There is a longstop date of 30 June 2020.
There is no guarantee that the vendors will permit a prolonged period of
uncertainty before completion of the Acquisitions; and
(3) The underwriting of the equity raise: The equity raise is at present fully
underwritten, though only to 6 May 2020. Again, there is no certainty that
the underwriters would extend the Standby Underwriting Agreement
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beyond that date, particularly given the current market uncertainty. The
equity raise is necessary, as the means to fund the Acquisitions.
ARCM’s undeclared accumulation of shares in the Group (“the hedge issue”)
[23]       One of the unusual features of these applications was the issue of ARCM’s hedge or
short position of the Group’s stock. From materials produced by the first respondent, the
Group is said to have “one of the most shorted stocks in the UK with 18.7% of the total
equity shorted” (para 2.2.8 of the Boyle Report (as after defined)). In the petition, the figure
ARCM is understood to hold is 16.85% of the shares of PO as at 6 January 2020 (see
statement 41.3.1). The petitioners’ understanding is set out in section 7 of Part A of the
Explanatory Statement. (ARCM dispute this narrative.) In brief, the petitioners understand
that ARCM first acquired a publically disclosable net short position (being .5% of the
ordinary shares in PO and each increment of .1% thereafter) in February 2017. ARCM failed
at that time to disclose this on the website of the Financial Conduct Authority (“the FCA”),
in breach of the EU Short Selling Regulation (Regulation (EU) No 236/2012 (“the Short
Selling Regulation”)). Over the intervening 33 or so months, ARCM continued to
accumulate a short position but it failed on each disclosable acquisition (which the
petitioners suggest were 80 in number) to publicise this, in breach of the Short Selling
Regulation. It did not disclose the accumulated short position until 9 December 2019.
[24]       Several matters flow from this. First, it is ARCM’s position that it was thereafter
frozen out of the discussions between the Group and the other Scheme Creditors and unable
to influence the final form of the schemes to be promoted. This is not accepted by the
petitioners, who point to extensive interactions with ARCM. Paragraphs 7.3 to 7.9 of Part A
of the Explanatory Statement also detail the Group’s consideration of the alternative
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proposals favoured by ARCM and the reasons these alternatives were not in the end
adopted. The petitioners also contend that this argument is irrelevant.
[25]       Secondly, this gave rise to a dispute between ARCM and the petitioners as to
whether this is a “short” (as the petitioners contend) or a “hedge” (as ARCM contend) (my
reference to this as “the hedge issue” is for ease of reference only, and does not mean I have
determined this matter). The first respondent lodged a report to support its position that
this was a hedge. The petitioners lodged an affidavit from Mr Charles Worsnip to support
their position that this was a short and, in any event, they argue that the characterisation as a
hedge or a short is irrelevant. Their positon is that, as ARCM would benefit from the
hedge/short from every drop in the price of PO’s shares (the greater the drop in share price,
the greater the profit it would make), the effect of this meant that ARCM has a different
economic incentive to that of the general body of Scheme Creditors (who, collectively,
would benefit from a rise in the share price). Putting it crudely, the more the share price
falls, the more ARCM will benefit; the more the share price rises, the more ARCM could
lose. And while in the former scenario, ARCM’s potential profit would be capped by the fall
in share price (ie, the price cannot fall below zero), in the latter scenario, ARCM’s potential
losses would be uncapped (as there was theoretically no limit on the amount the share price
might rise).
[26]       The petitioners did not directly address the relevance of ARCM’s pre-Schemes
comments (quoted four paragraphs above), or of ARCM’s breaches of their obligations of
disclosure as they accumulated their position on the hedge. In response to a question from
the court, the petitioners’ Senior Counsel expressly eschewed invoking against ARCM or the
first respondent any doctrine of coming to court with clean hands. Their position was that
the hedge placed ARCM in a conflict of interest vis à vis the other creditors. They referred to
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the Reporter’s conclusion (at para 4.78 of his Report) that by reason of the hedge, ARCM’s
complaints about the unfairness of the Scheme should be discounted. I turn now to outline
the first respondent’s challenges to these Schemes.
The Scheme Meetings
[27]       The meetings of the Scheme Creditors in the two Scheme Meetings were held on
20 February 2020. The Minutes of those meetings, which were chaired by the Group’s
Finance Director, Mr Rose, were lodged. ARCM did not attend the Scheme Meetings,
though they arranged for legal representation. They made no challenge at the Scheme
Meetings to the composition of the classes. The two classes of creditors, comprising the
Super Senior Creditors as one group and all other creditors (ie the Senior Creditors and the
Retail Bond holders), voted overwhelmingly in favour of the Schemes. In their Note on
Class (at para 27) the petitioners set out the votes cast by debt instruments. In each of the
following classes ARCM were the only opposing creditors (their % of the vote against is
stated in parentheses), whereas all other creditors in that class voted in favour:
(1) Super Senior (ie secured) Creditors holding RCFs and LC facilities (13%),
(2) Senior Creditors holding RCFs (13%),
(3) Term Loan facilities (35%), and
(4) USPP Notes (7%).
In two classes there were other votes against, as follows:
(5) Converted Facility (ARCM was 40%; others opposing, 8%),
(6) Retail Bonds (ARCM was 1%; others opposing, 2%).
In the final debt instrument the vote in favour was 100%
(7) Nelson Bilateral LC Facility.
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In summary, 87% of the Super Senior Creditors voted in favour of the Schemes (ARCM’s
total against was 13%) and 84 % of the Senior Creditors and Retail Bondholders voted in
favour (ARCM comprised 15.5% of the 16% opposed). In practical terms, had the creditor
classes been comprised of debt instruments, which is ARCM’s position, ARCM would have
had a blocking vote only of the Term Loan Facilities creditors and the Converted Facilities
creditors each voted as separate classes.
Outline of the first respondent’s challenges to the Schemes
Anterior jurisdictional challenges
[28]       The Buckley test, as reformulated by Snowden J in Re Noble Group Ltd (No 2) [2019] 2
BCLC 548 at paragraph 17 (set out under the heading “The Part 26 Jurisdiction”, at para
[41]      , below) is a helpful framework in which to situate ARCM’s challenges. The first stage of
the Buckley test (whether the provisions of the statute have been complied with) are often
referred to as ”jurisdictional” challenges. However, ARCM also advanced further, anterior
jurisdictional challenges on grounds not readily encompassed within the Buckley test. (For
convenience of reference, ARCM’s grounds of challenge are numbered sequentially,
notwithstanding the different subheadings in the following paragraphs.) ARCM’s
overriding submission in relation to their anterior challenges was that the Schemes go
beyond what is permitted as a “compromise or arrangement” between a company and its
creditors. The elements of this challenge are as follows:
1) Novelty of forced Acquisitions: The Acquisitions result in a fundamental change
to the risk profile of the Group; in seeking sanction to acquire significant
assets the Schemes are novel and not within the permissible scope of the
Court’s jurisdiction;
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2) The Schemes take but do not give: A “compromise or arrangement” involves
“give and take”. In compelling the Scheme Creditors to vote in favour of the
Acquisitions, the Schemes permanently alter their voting rights (the de facto
effect of which would be to deprive ARCM of their blocking vote in one or
two of the creditor classes (defined in terms of debt instruments)); this
involved “taking” something from the creditors without “giving” them
anything in return; and
3) Purported changes to non-pecuniary rights: A scheme can only compromise
“pecuniary” rights of a creditor of a company. Neither the forcedapproval
of the proposed Acquisitions nor the proposed confiscationof the voting
rights, are “pecuniary” or creditor rights that fell within the jurisdiction of
schemes under part 26 of the 2006 Act.
The Buckley stage 1 challenges: compliance with the statute, jurisdiction and the adequacy
of the Explanatory Statement
[29]       One of ARCM’s (or more properly, the first respondent’s) principal challenges was
the not uncommon jurisdictional one on class composition. (This is because, if classes of
creditors are not correctly constituted, the court ultimately has no jurisdiction to sanction the
scheme (per Re Hawk Insurance Co Ltd [2001] EWCA Civ 241 (“Hawk”).) The first respondent
advanced several discrete challenges in respect of class composition as follows:
4) Incorrect class composition: The first respondent’s principal contention was that
the petitioners’ division of the Scheme Creditors into two classes, namely the
Super Senior Creditors as one class and the other class comprised of all other
Scheme Creditors (regardless of debt instrument and including the Retail
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17
Bondholders), was incorrect. Its final position as to the appropriate classes of
creditors, as revealed in its written submissions lodged shortly in advance of
the Sanctions Hearing, was that there should be a separate class of creditor
for each debt instrument, reflecting the classification recorded in the 2017
Override Agreement (“the 2017 Override Agreement”).
5) The wrong comparator: Closely allied to class composition issue was the
question of the proper comparator. The first respondent contends that the
Group is not insolvent (when assessed against the statutory grounds of
insolvency found in the Insolvency Act 1986 (“IA 1986”)); that the Group and
Mr Rose (the Group’s Finance Director) made conflicting statements as to the
risks the Group faced as the Scheme Maturity Date approached (“the
insolvency issue”); that the Group had a significant Enterprise Value and that
evidence was required to resolve these disputed matters of fact.
6) Inadequate Explanatory Statement: ARCM contend that the Explanatory
Statement was inadequate to such an extent that none of the creditors who
voted in favour of the Schemes could have made a properly informed
decision.
The Buckley stage 2 challenges: were the classes fairly represented at the Scheme Meetings?
[30]       The first respondent contends that the interests of the classes of creditors were not
fairly represented at the meeting, or that their interests were so diverse as to make it
impossible for them fairly to meet together. In particular,
7) Fees or “special interests”: The first respondent referred variously to fees or
“special interests”. It queried whether there were undisclosed fees payable to
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some of the creditors and which improperly influenced the creditors who
voted for the Schemes. It also contended that there were “special interests”,
in the form of payments, which meant there was a materially greater benefit
of the Schemes to some creditors when compared to others. When analysed,
the changes to interest rates, coupled with a variety of fees paid, disclosed
such a variance of change that these creditors could not sensibly form one
creditor class. Also encompassed within the characterisation of “special
interests” was the constitution of a new majority of 66.66% of creditors to
make any amendments (which meant, in effect, the Supporting Creditors),
and that creditors in some debt instrument groups will be able to trade out of
their debt more readily than others.
8) Mr Rose’s unfair comments about ARCM: Whether the comments made at the
outset of each the Creditor Meetings by the petitionerschair, Mr Rose,
disclosed bias and/or improperly influenced the creditors who voted for the
Schemes;
9) The ARCM hedge or short: The relevance, if any, of ARCM’s (only lately
disclosed) accumulation of shares in the Group, and described variously as a
hedge or a short.
The Buckley stage 3 challenges: The Schemes are not fair
[31]       The first respondent contends that the Schemes involve overriding unfairness. To
some extent this involved a reference to criticisms already advanced: the Explanatory
Statement omitted important information, contained false statements and as a whole did not
put creditors in a position to make a reasonable judgement as to whether the Schemes were
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in their commercial interest; the classes were not fairly represented at the meetings because
of the special interests granted in favour of some Scheme Creditors but not others; the
Schemes are not ones the Scheme Creditors could reasonably approve as there was no
justification for confiscation of voting rights and the proposed Acquisitions made no sense;
and there were blots on the Schemes (these are detailed below). In addition, it was
contended
10) that the effect of the decline in oil and gas prices have resulted in so profound
a change that the Acquisitions are no longer economically viable, such that
the Schemes the Scheme Creditors approved are no longer reasonably
capable of implementation. The lock up arrangements preclude the Scheme
Creditors from voicing this.
11) Further, the Reporter misapplied the law in his Report and uncritically
accepted the facts and assumptions presented by the petitioners without any
testing of them.
The first respondent maintained that all these matters involve disputes of fact for which a
proof was required. For these reasons, the first respondent moved the Court to refuse to
sanction the Schemes and to allow a proof.
The Buckley stage 4 challenges: there are blotson the Schemes
[32]       The first respondent also contends that there are blotson the Schemes. In
particular,
12) The conditionality of the Schemes: The Schemes are conditional. As the
conditions are under the control of third parties, and not the Court, this is
impermissible;
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13) The Schemes are self-amending: The Implementation Deed can be amended to
alter the Schemes in any way by a 66.66% majority, again without the consent
of the Court. This was another impermissible exclusion of the Court’s
jurisdiction; and
14) The unfair exclusion of ARCM from the prior negotiations: The first respondent
contends that negotiations of the Schemes were conducted in a manifestly
unfair manner, which involved the exclusion of ARCM from the discussions
and the mischaracterisation of ARCM’s hedge position. ARCM’s position is
that two unfair consequences flowed from their voluntary, albeit late,
disclosure: first, that they were unfairly excluded from the final discussions
amongst the creditors and the Group and therefore could not influence the
Schemes; and secondly, the comments of the petitioners’ chairman at the class
meetings were so unfair as to constitute bias and to have influenced the other
creditors to vote against ARCM.
15) The power of attorney issue: The Schemes purport to grant a power of attorney
to PO. This is a matter governed by English law. However, the court’s
interlocutor does not constitute a “deed” for this purpose, and this is
accordingly incompetent. The petitioners and the first respondent each
lodged affidavits from Senior Counsel qualified in English law to support
their respective positions. This was a further matter that the first respondent
contended that the Court could not resolve without hearing evidence.
Petitioners’ undertakings
[33]       The following undertakings were proffered at the sanctions hearing:
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1) The petitioners and first respondents agreed, in effect, to a reduce period of 7
days within which to reclaim (or appeal) the Court’s order. Toward the end
of the sanctions hearing, the petitioners offered an undertaking to resolve the
criticised self-amending blot (ground of challenge (13), above). This was
accepted by the first respondent and this ground of challenge was not
maintained.
The sanction hearing
Procedural history
The first hearing and appointment of the reporter
[34]       In Scottish procedure, a party seeking sanction for a scheme under Part 26 does so by
presenting a petition to the Court. The operative orders sought are contained in the
“prayer” of the petition and, if granted, will be brought into effect by the Court’s
interlocutor (ie the court order). At the first hearing of such a petition, the first orders the
Court will typically grant include the appointment of a reporter, and the timetable for
notification and holding of the meetings of the scheme creditors, for any answers to be
lodged in due course and for the lodging of the reporter’s report. The Court maintains a list
of approved reporters for this purpose who are solicitors with expertise in schemes under
Part 26. In anticipation of bringing forward a petition, the petitioner’s agents will first
contact the Court for the name of the solicitor next on the list (as was done in this case, when
Lord Doherty identified John Stirling as the next reporter to serve by rotation). Thereafter
the petitioner’s agents will make informal inquiries of the reporter to ascertain his or her
availability and to confirm there is no conflict of interest. The reporter, who has been
described as the “eyes and ears of the court”, is independent of the parties. In Scottish
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practice, the reporter enquires into the petitioner’s proposed scheme; s/he reviews the
documentation relative to it; and s/he comments on the conduct of the Scheme Meetings and
on any answers lodged in the court process. The reporter in this case had also assisted the
reporter appointed by the Court in relation to the 2017 Schemes.
[35]       The final stage is the sanctions hearing. In contrast to what I understand is the usual
practice in England, the sanctions hearing in Scotland is generally not an evidential hearing.
In Scottish practice, the court has the benefit of the reporter’s report and it considers this,
together with the petition, any answers, the petitioner’s (and any other party’s) written
submission (the practice being to lodge detailed submissions in advance of the sanctions
hearing), the productions and the relative caselaw. On the rare occasions when there is a
question about class composition, this is dealt with at the sanctions hearing and not (as I
understand may be the practice in England) at a separate hearing for this purpose, prior to
the sanctions hearing.
The first respondent’s interim interdict
[36]       On the eve of the first hearing in these petitions, the first respondent sought to
interdict ad interim the grant of first orders. The petitioners appeared and opposed that
motion. The Supporting Creditors instructed Senior Counsel to attend on a watching brief.
After hearing extensive argument, I refused that motion and the first hearings in these
applications were held and the usual first orders granted. I indicated to the parties’ senior
counsel, that if there was to be a challenge to class composition (prefigured in some of the
submission at the interim interdict hearing), the court would arrange for that issue to be
considered in advance of the sanctions hearing. That offer was not taken up.
By Order of 6 March 2020
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[37]       A one-day sanctions hearing was fixed for 17 March 2020. However, I fixed a By
Order hearing for 6 March 2020 (“the By Order”) to deal with any interlocutory matters that
might arise prior to the sanctions hearing. On 3 and 4 March, the first respondent lodged all
its productions (detailed below), which comprised 178 productions totalling approximately
6,000 pages. Both parties also lodged supporting affidavits. A variety of motions were
enrolled shortly before the By Order hearing. The Court dealt with these at the By Order
hearing on 6 March and it also made certain orders in respect of further procedure. One of
the matters raised was the form of the sanctions hearing. The petitioners moved for a
hearing on affidavits and the documents; they were supported in that motion by the
Supporting Creditors. The first respondent moved for an 8-day proof. Given the volume of
materials just produced, it was not appropriate to determine the first respondent’s motion
for a proof at the By Order hearing, and the emerging Covid-19 virus emergency would
likely preclude a hearing of that length in early course (this proved correct, as the UK
lockdown commenced on 23 March, the Monday following conclusion of the sanctions
hearing). To facilitate participation of parties’ legal representatives from other jurisdictions,
I granted permission for a live-note transcription of the sanctions hearing, and further
authorised the use of mobile phones in court if immediate instructions were required from
those following proceedings from remote locations.
Materials lodged for the Sanctions Hearing
[38]       While I reserved the first respondent’s motion for proof, I directed that the Sanctions
Hearing proceed in the usual way on affidavits, the documents and submissions. If it
transpired during that hearing that evidence was required on certain issues, this could be
the focus of any further hearing thereafter. In response to court orders (directed to making
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the most efficient use of the Sanctions Hearing), the parties each lodged written submissions
(of no more than 50 pages in length) (and which I will refer to as the named party’s
“Submissions”) , a joint bundle of authorities (which amounted to 7 folders totalling
120 items), reading lists of their own productions and of key passages in the authorities, and
lists of essential topics for cross examination of other parties’ witnesses. (The latter was to
assist the Court in further consideration of the first respondent’s continued motion that there
were disputes of fact which necessarily required a proof.)
[39]       I am grateful to the parties and their legal representatives for their considerable
efforts in complying with these orders in the timescale provided. I have considered these
materials. I do not propose to rehearse those matters in detail in this Opinion. I have, of
course, also considered the parties’ four Notes on Class Composition (ARCM submitted a
Supplementary Note on Class) submitted to the Reporter, the Reporter’s Report (“the
Report”) and Mr Rose’s Reports of the Scheme Meetings.
The Reporter’s Report
[40]       The Reporter produced his report on 11 March. In his Report, the Reporter details the
background to and issues arising in the Schemes and the procedures followed (prior to the
promulgation of the Schemes, in the identification of the creditor classes, compliance with
the Court’s first orders convening the Scheme Meetings and the procedure at those
meetings). He provides his views on the jurisdiction of the Court, on ARCM’s arguments
and any facts said to be disputed, and on the central question of whether the Court should
in its discretion sanction the Schemes. Having considered matters, the Reporter’s view is
favourable to the Schemes; he does not accept any of ARCM’s challenges to them; and he
identifies no procedural, technical or other matter that would preclude the Court from
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sanctioning the Schemes. I do not propose to set out the Reporter’s’ views in any more
detail at this stage, though I do note his views on certain issues in the course of my
discussion of the issues, below.
[41]       The 4-day hearing on the sanction of the Schemes (conducted in three days, in light
of the impending impact of the Coronavirus) proceeded by way of affidavits and oral and
written submissions, and was concluded on 19 March. The petitioners and the Supporting
Creditors moved, inter alia, for sanction of the Schemes. The first respondent opposed this
and maintained its position that an evidential hearing was required.
The Part 26 jurisdiction
[42]       As will be seen, the battle lines between the parties were drawn on many fronts,
including on the formulation of some of the applicable legal tests. There was, at least, no
dispute as to the broad outlines of the jurisdiction of the Court under Part 26 and the four
stages for consideration of a scheme (“the Buckley test”), recently restated by Snowden J in
Re Noble Group Limited (No.2) [2019] BCC 349 (“Noble (No 2)”)at para 17. The four stages are
as follows:
(1) Stage 1: The Court “must consider whether the provisions of the statute have
been complied with. This will include questions of class composition, whether
the statutory majorities were obtained, and whether an adequate explanatory
statement was distributed to the creditors”;
(2) Stage 2: The Court “must consider whether the class was fairly represented by the
meeting, and whether the majority were coercing the minority in order to
promote the interests adverse to the class whom they purported to represent”;
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(3) Stage 3: The Court “must consider whether the scheme is a fair scheme which a
creditor could reasonably approve. Importantly it must be appreciated that the
Court is not concerned to decide whether the scheme is the only fair scheme or
even the “best” scheme”; and
(4) Stage 4: The Court must consider whether there is any “blot” or defect in the
scheme that would, for example, make it unlawful or in any other way
inoperable”.
[43]       I set out below parties’ submissions on the law applicable to class composition.
Before setting out the first respondent’s grounds of challenge to the Schemes, I describe the
materials it lodged.
The first respondent’s reports
[44]       The first respondent lodged a significant amount of materials a few days before the
By Order hearing fixed for 6 March. The bulk of these materials (c 6,000 pages lodged)
comprised the appendices to four reports. The four reports were from Mr Ed Boyle of
KMPG (“the Boyle Report”), Ms Lyuda Sokolova of KPMG (“the Sokolova Report”),
Mr Jonathan Fuller of Xodous (“the Xodus Report”) and Dr Chudozie Okongwu of NERA
(“the NERA Report”) (these reports are collectively referred to as “the ARCM Reports”). It
also lodged affidavits from two of its officers, a Mr Alp Ercil (“Ercil 1” and “Ercil 2”) and
Mr Matthew Prest (“Prest 1” and “Prest 2”).
[45]       While I have considered the ARCM Reports and affidavits in detail, I need only
summarise the key points from those materials.
The Boyle Report
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[46]       Mr Boyle is an insolvency practitioner with expertise in financial services insolvency.
He accepts (at para 1.2.4) that he has little experience in the oil and gas sector, the sector in
which the Group operates, and that he is not an expert in capital markets (para 2.5.10). The
principal points in his report are:
(1) As the Group has net assets of $1,100 million as at 30 June 2019, the Group is
not balance sheet insolvent within the meaning of section 123 of IA 1986 (see
section 4);
(2) As at the Group’s year end of 31 December 2019, it was currently able to pay
its debts as they fell due (para 2.3.9) and so is not cashflow insolvent within
the meaning of section 123 of IA 1986;
(3) He concluded that the Group appeared solvent and that an insolvency
scenario is “unlikely (albeit not impossible) in the near term”, even if the
Proposed Transactions failed, however he did not factor in market volatility
into this assessment (para 2.3.9); he also acknowledged a limitation on his
analysis in the absence of more detailed non-public information that would
typically be provided by a company (para 4.2.1);
(4) There was sufficient time before the Scheme Maturity Date for the Group
directors “to consider a range of restructuring options and negotiate with
stakeholders to implement an agreed restructuring solution” (para 2.3.8);
(5) In respect of the Group’s short-term forecast liquidity to the Scheme Maturity
Date (considered in detail in section 5), on any of the scenarios Mr Boyle
considered there is insufficient liquidity to repay the Group’s debt facilities at
the Scheme Maturity Date (paras 2.3.7, 5.5.5 and 5.6.3). Accordingly, a
solution would be required “in order for the Group to continue to trade and
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to avoid a payment default” (para 5.6.3), although Mr Boyle regarded this as
a capital structure problem;
(6) In respect of medium-term forecast liquidity to 3 December 2025 (considered
in section 6), Mr Boyle concluded that the Group could continue to trade and
to deleverage, even absent any new monies, so long as the creditors granted
an extension of the maturity date (para 2.4.2 and 6.3.1);
(7) He considered (in section 7) a number of alternative options (to those
comprised in the Schemes). Having considered the PWC Report set out in the
Explanatory Statement, Mr Boyle agreed with its commentary that it would
not be possible to put in place an RBL facility and to achieve an issue of High
Yield Bonds (“HYB”) of the amount required to refinance by April 2020
(para 7.4.8). He thereafter proceeded to consider other financing options,
such as partial refinancing (which “may be possible” if the creditors would
agree to it) (he accepts that full refinancing prior to the Scheme Maturity Date
is not viable (para 7.4.8)), a voluntary or involuntary extend and amend
(which is “simple to implement” and is “credible”, though he accepts that
negotiations can be “complex” (para 7.3.19)), disposal of non-core assets
(though none are identified), an equity raise (which he accepts is not a
standalone solution (at para 7.7.15)), a debt for equity swap (which is
dismissed as “unlikely to occur as it would be a very complex transaction”
(para 7.8.12), and a sale (via a merger &acquisition (“M&A”)) of the Group as
a whole (which he does not have the expertise to comment upon, but relies on
the view of a colleague to dismiss this as untenable) (para 7.6.2);
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(8) In the absence of any of these solvent alternatives, he accepted that the Group
could be forced into insolvency (para 7.9.14);
(9) At best, he concludes that these are “the most likely areas that could feasibly
be explored by the Group” (para 2.5.6), and that one or more of the options he
identified “could be explored in combination … [with] a disposal of assets
combined with a voluntary or involuntary [amend and extend] of facilities”.
(10) He concluded that, given the 14 months to the Scheme Maturity Date, which
he asserts is “highly likely to be sufficient time to explore, and if a consensus
is found, to execute any of the alternatives” (paras 7.15.4; 2.5.6). He
considered that the “key determinant” is the ability of the Group, the Scheme
creditors and the potentially the shareholders, to “reach a consensus on the
way forward” (para 7.15.4). There appeared to be a stable platform to
negotiate and implement an alternative option.
(11) An administration or insolvency scenario would “likely result in a
significantly worse financial outcome for the creditors as a whole”
(para 2.5.12).
The NERA Report
[47]       The purpose of the NERA report was to consider the economics of the Acquisitions,
their associated benefits and risks, their attendant decommissioning liabilities and to
consider how this was presented in the Explanatory Statement. It considered the change in
the Group’s relative exposure to the UK gas and oil markets and it examined certain
assumptions (eg price assumptions underpinning the proposed benefits and risks of the
Acquisitions, the assumed production volumes) and the ability of the Group to refinance the
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Scheme Debt Facilities on the hypothesis that the Acquisitions are implemented. In general,
having identified that the effect of the Acquisitions will mean that gas will comprise about
74% of the Group’s output in future, the author of the NERA Report believes that the
assumptions supportive of the benefits (including the estimated value of the reserves) are
over optimistic and those underpinning the risks are understated (eg of decommissioning).
In relation to the RBL capacity, which is the principle driver for the Acquisitions, the NERA
Report concludes that there is “a substantial risk” that this strategy is unsuccessful (para 120
of section 8.5).
The Fuller Report
[48]       The Fuller Report was instructed to assess the technical and commercial aspects of
the Acquisitions, any associated risks (including decommissioning liabilities) and benefits,
and the presentation of these matters in the Explanatory Statement. It contained an
exhaustive analysis of historical decommissioning costs in the North Sea, which typically
involved cost overruns, and it seeks to apply this to the Acquisitions. The author of the
Fuller Report disagreed with some of the assumptions as to future events (eg oil and gas
prices). Mr Fuller does not criticise the disclosures in the Explanatory Statement anent
decommissioning.
Mr Prest
[49]       Mr Prest’s principal affidavit (“Prest 1”) details a large number of criticisms (see
paras 109 to 130) of the Schemes.
[50]       Mr Prest also advances the criticism that the PWC Report was lacking in
independence, because it applied the Group’s working assumptions.
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Mr Ercil
[51]       Mr Ercil is also critical of what he says are mischaracterisations in the Explanatory
Statement of ARCM and its dealings with the Group (see Ercil 1 at para 184).
The Sokolova Report
[52]       The Sukolova Report was instructed to address the enterprise value (“EV”) of the
Group, which she identified as substantial, and also to review the Group’s own model.
Matters relevant to the question of comparator
Characterisation of the risks to the Group if no Schemes
[53]       One of the first respondent’s challenges is to the comparator used for identifying the
appropriate creditor classes. The first respondent submits that, as the Group is not insolvent
on either of a balance sheet or cashflow basis, the Group was wrong to use insolvency as the
counterfactual. In support of its position, the first respondent has produced the ARCM
Reports noted above. The first respondent also submits that the petitioners and Mr Rose
have been inconsistent in their pronouncements as to the Group’s financial prospects and,
accordingly, a proof is required to challenge Mr Rose’ credibility and reliability. The
petitioners and the Supporting Creditors submit that this is to apply too narrow a definition
to insolvency. I consider the parties’ competing submissions on the solvency issue, below. I
next set out the statements made on the Group’s financial prospects.
Statements by or on behalf of the Group
The Explanatory Statement
[54]       The Explanatory Statement set out the Group’s prospects as follows:
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32
(1) The refinancing risk: That “although the Group has taken steps to deleverage
its balance sheet since the 2017 Refinancing, the Directors’ view (based on
current assumptions as to the future of oil and gas prices) is that there is a
very substantial risk that the Scheme Debt Facilities will not be capable of
being refinanced through new debt facilities either by the end of June 2020
when the Scheme Debt Facilities would have to be classified as ‘current
liabilities’ (for accounting purposes) or by their existing maturities in May
2021” (Part A, para 2.23). This statement is expanded upon (at para 18.7), as
follows: “and that, in the absence such refinancing, [the Group] would be
unable to pay their liabilities under the Scheme Debt Facilities at their
existing maturity date. (See section 18, under rubric “What Happens if the
Schemes Do Not Become Effective”.) (Emphasis added.)
(2) Risks of the Scheme Debt becoming current: After noting that the Scheme Debt
Facilities make up the vast majority of the Group’s total liabilities, it is stated:
“Unless the Group is able to demonstrate that it has a plan to refinance or
extend the maturity of the Scheme Debt Facilities that is capable of
implementation in the time available and has the requisite creditor support,
disclosing such indebtedness as current liabilities… could have a number of
significant negative consequences when the Group’s financial statements are
made publicly available, which is currently scheduled to occur in August
2020.” The risk was that the Group’s commercial counterparties would likely
interpret this change in the financial statements….as a sign that the Group
has lost the confidence of its creditors. And that suppliers might infer that the
“Group is suffering, or is about to encounter, serious liquidity problems…”.
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(3) The risk of insolvency: The statement in Part A of the Explanatory Statement
addressed the risk of insolvency. It stated that if an extension to the
maturities of the Scheme Debt Facilities was sought against a backdrop of
imminent debt maturity and a potential liquidity shortfall, and specially
following a failed scheme, the process would be less controlled and with a
greater risk of “significant value destruction”. The conclusion was stated (at
para 18.13): “Ultimately, there is a very substantial risk (based on current
assumptions as to future oil and gas prices) that it would not be possible to
refinance or agree an extension of the maturity date, which would make
insolvency of [the Group] a real possibility in 2021 (if not before).” An
insolvency would be “highly destructive to the returns of Scheme Creditors”.
The Rose Affidavits
[55]       The Group’s Finance Director, Mr Rose, produced three affidavits for the sanctions
hearing.
(1) His principal affidavit (“Rose 1”), dated 12 February 2020 and extending to
85 pages (with a lever arch file of appendices), dealt comprehensively with
the Group’s position, the general background to debt and equity financing for
companies in the Group’s sector and to the Group and to the 2017
Refinancing, the steps taken by the Group since the 2017 Refinancing with a
view to facilitating a full refinancing of the Scheme Debt Facilities, and the
risks of the Group entering into insolvency proceedings in the near to
medium term.
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(2) His first supplementary affidavit (“Rose 2”), dated 12 March 2020 and
extending to 38 pages, addressed the substantial volumes of materials
produced by the first respondent on 3 and 4 March (including two witness
statements, four reports and multiple volumes of appendices, and a second
inventory of productions). Rose 2 responded to the first respondent’s
criticisms of the adequacy of the Explanatory Statement and its contention
that there were alternatives to the Schemes. He also addressed in more detail
the likelihood of the Group entering into insolvency proceedings in May 2021
(if not before) and the urgency of the Schemes.
(3) Mr Rose’s third affidavit (“Rose 3”), dated 12 March 2020, responded to the
second affidavit of Mr Ercil (“Ercil 2”) and the recent market developments,
including the recent drop in oil prices, and its impact on the Schemes.
Mr Rose’s statements of the Group’s risk of near to medium term insolvency
[56]       The issue of the Group’s risk of insolvency in the near to medium term was dealt
with most comprehensively in Rose 1 (at paras 172 to 177). After referencing
paragraphs 18.12 and 18.13 of Part A of the Explanatory Statement, Mr Rose noted ARCM’s
contentions
(1) that the phrase “very substantial risk” meant that it was more likely than not
that the Group would be able to refinance absent the Schemes, and
(2) that a “real possibility” of insolvency meant that it was more likely than not
that insolvency proceedings would be avoided.
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Mr Rose categorically rejected those contentions. In relation to (1), the risk of insolvency, he
explained that it had not been necessary to quantify in percentage terms “the very
substantial risk of the Group not being able to refinance absent the Schemes”. He continued:
“for the avoidance of doubt, my view, which is shared by my fellow Directors, is
that, absent the Schemes, it is more likely than not that it would not be possible to
conclude a successful refinancing before June 2020 (when the Scheme Debt Facilities
become current) or ahead of the 2021 Maturity. This risk is increasing day by day. If
the Group was not able to refinance the Scheme Debt Facilities, the Group would
likely attempt an alternative restructuring. However, for the reasons I explain in this
affidavit, I do not have a sufficient basis to conclude that any such restructuring
would be successful. It follows that the consequence of not being able to refinance is
that the relevant Group Companies would more likely than not enter into
insolvency proceedings in May 2021 (if not before)”. (Emphasis added.)
While ARCM appeared to consider the Group to be solvent on a balance sheet basis, that
was not determinative and it did not mean that creditors would recover in full on their
outstanding debt claims (see paras 174, 176). Mr Rose explained that it was necessary to
consider the question of insolvency risk from the perspective of cashflow insolvency. It was
his view (at para 174) that:
“the risk of being unable to refinance the Scheme Debt Facilities (with the
consequence of the relevant Group companies entering into insolvency proceedings)
has increased, and continues to increase. Without such a refinancing, and assuming
the 2021 Maturity is not extended (and there is insufficient basis to conclude that it is
likely that it would be), it is plain that the Group would not be able to repay the
Scheme Debt Facilities on the 2021 Maturity”. (Emphasis added.)
[57]       Mr Rose confirms these views in Rose 2 (eg see paras 13, 19 and 30 to 45) and in
Rose 3 (at para 29). He stressed that the Schemes present the best way forward and the only
means identified by the Group which has the support of sufficient Scheme Creditors to be
implemented in the time available. He responded at length to the Boyle Report (which had
concluded that the Group was not balance sheet insolvent), and which had not changed his
views. He explained that in considering the Group’s financial prospects, the appropriate
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36
focus was on cashflow, not balance sheet insolvency. He remained of the view that, absent
the Schemes, it was more likely than not that it would not be possible for the Group
successfully to conclude a refinancing before June 2020 (when the Scheme Debt Facilities
become current) or ahead of the 2021 Maturity. He also responded to ARCM’s criticisms
that the Group’s statement of 5 March 2020 (“the March Release”) relative to the release of
the Groups annual accounts to the year ended 31 December 2019 (“the 2019 Accounts”)
were more positive about its financial prospects and was therefore inconsistent with the
Group’s position in the Explanatory Statement or other statements by Mr Rose.
The March Release
[58]       Mr Rose explained that the observations of the Group as a “going concern” in the
March Release related to the period covered by the 2019 Accounts, consistent with
applicable accounting standards, and did not have to address the question of the ability of
the Group to repay the Scheme Debt Facilities at maturity in May 2021 (which the
Explanatory Statement addressed), because that was outwith the term covered by the 2019
Accounts. Accordingly, there was no inconsistency between the March Release and the
Explanatory Statement.
ARCM’s views on the risk facing the Group prior to the promotion of the Schemes
[59]       The petitioners refer to certain statements by ARCM made prior to the presentation
of these Schemes consistent with the petitioners’ assessment of the Group’s financial
prospects. I need only quote one example, which is ARCM’s letter of 18 December 2019 to
the Group. This referred to the Group “facing a debt maturity wall in under 18 months a
highly leveraged structure and no possibility of a full refinancing of the 2021 maturity” and
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37
that “considering that the May 2021 debt becomes current in less than six months, we
believe [the Group] must address this debt maturity”.
Parties’ legal submissions on class composition
The dispute on the proper approach to class composition
[60]       One of the first respondent’s principal challenges was to the Group’s division of the
Scheme Creditors into only two classes for the purposes of voting on the Schemes at the
Scheme Meetings. ARCM’s ancillary criticisms include the issue of the correct comparator
and the payment of fees.
[61]       The correct class composition is critical; if the classes of creditors are not correctly
constituted, the court ultimately has no jurisdiction to sanction the scheme: Hawk, cit supra,
at para 22. However, there is no statutory test for class composition under Part 26 of the
Companies Act 2006.
[62]       With a view to using the Sanctions Hearing to focus on areas of dispute and to have
parties agree uncontroversial matters, I directed parties to produce a joint statement of
agreed legal principles on class composition. Somewhat surprisingly, given the abundance
of the case law (or perhaps because of it), parties were unable to agree what might be
considered settled law in England, especially on the issue of class composition. I summarise
parties’ principal submissions, noting their points of difference.
[63]       The essential differences between the first respondent and the other parties was
whether “arrangements” should be narrowly or broadly construed; whether essentially the
test focuses on dissimilarity (as ARCM does, but which the petitioners argue is to ignore
stage 1 of the Buckley test and the assessment of similarity); the meaning of insolvency
Page 38 ⇓
38
(whether this is equated to the statutory definitions in the IA 1986 or attracts a broader
definition); and the assessment of interests derived from legal rights.
The two-stage test derived from two English Court of Appeal decisions
[64]       In England, the Court of Appeal set out the legal test in Sovereign Life Assurance Co v
Dodd [1892] 2 QB 573 (“Sovereign Life”). This has been confirmed by the Court of Appeal in
England more recently in the case of Hawk. It involves a two-stage test (per Sovereign Life; Re
Apcoa Parking Holdings GmbH [2015] BCC 142 (Apcoa” at para 52)), namely:
“(1) At the first stage, the court considers the legal rights of the relevant creditors.
There are two sets of rights that are relevant in this context (Re Hawk Insurance
Co Ltd [2001] BCLC 480, at para 30; Re UDL Holdings Ltd [2002] 1 HKC 172 at
para 17):
(i) the existing rights against the company, which are to be released or
waived under the scheme; and
(ii) the new rights (if any) which the scheme gives to those whose rights
are to be released or waived.
(2)
If there is no material difference between the legal rights of the relevant
creditors, they will form a single class, and there is no need to proceed to
the second stage of the test.
(3)
If there are material differences between the legal rights of the relevant
creditors, at the second stage the court needs to assess the relevance of
those differences.
(4)
A class must be confined to 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 in order to avoid the unnecessary proliferation of
classes: Sovereign Life Assurance v Dodd, at page 583.”
[65]       The first respondent did not explicitly acknowledge the two-stage test the
petitioner identified, although its own reliance on para 30 of Hawk, which is the source of
the petitioner’s analysis, would suggest the two-stage test is not disputed as wrong in law.
The first respondent’s approach was to condense the test into its latter part, ie focusing on
dissimilarity. The first respondent submitted that the legal test is whether the rights of
creditors are so dissimilar as to make it impossible for them to consult together with a
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39
view to their common interest. In support of this approach, the first respondent cited the
following passages:
(1) Lord Justice Bowen in Sovereign Life (at p.583), where he said:
The word classis vague, and to find out what is meant by it we must look
at the scope of the section, which is a section enabling the Court to order a
meeting of a class of creditors to be called. It seems plain that we must give
such meaning to the term classas will prevent the section being so worked
as to result in confiscation and injustice, and that it must be confined to 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.
(2) Lord Justice Chadwick in Hawk who stated that:
“’a classmust be confined to 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” (para 30).
And, further, at para 33 in relation to “class rights”:
“When applying Bowen LJ’s test to the question ‘are the rights of those who
are to be affected by the scheme proposed such that the scheme can be seen as
a single arrangement; or ought it to be regarded, on a true analysis, as a
number of linked arrangementsit is necessary to ensure not only that those
whose rights really are so dissimilar that they cannot consult together with a
view to a common interest should be treated as parties to distinct
arrangements so that they should have their own separate meetings but
also that those whose rights are sufficiently similar to the rights of others that
they can properly consult together should be required to do so; lest by
ordering separate meetings the court gives a veto to a minority group. The
safeguard against majority oppression is that the court is not bound by the
decision of the meeting. It is important Bowen LJ’s test should not be applied
in such a way that it becomes an instrument of oppression by a minority.”
(3) Lord Millett (a Law Lord who was in the House of Lords prior to that court
becoming the United Kingdom Supreme Court) in Re UDL Holdings Ltd
[2002] 1 HKC 172, at p.184 F to I (UDL”), who summarised the class test as follows:
“(2) Persons whose rights are so dissimilar that they cannot sensibly
consult together with a view to their common interest must be given
separate meetings. Persons whose rights are sufficiently similar that they
can consult together with a view to their common interest should be
summoned to a single meeting.
Page 40 ⇓
40
(3) The test is based on similarity or dissimilarity of legal rights
against the company, not on similarity or dissimilarity of interests not
derived from such legal rights. The fact that individuals may hold
divergent views based on their private interests not derived from their
legal rights against the company is not a ground for calling separate
meetings.
(4) The question is whether the rights which are to be released or
varied under the scheme or the new rights which the scheme gives in their
place are so different that the scheme must be treated as a compromise or
arrangement with more than one class.”
[66]
The petitioners referred to other more recent cases in which the
Sovereign/Hawk test is reformulated or elaborated. So, for example, the petitioners
also submitted that the cases indicate that a broad approach to class is taken and
“differences may be material, certainly more than de minimis, without leading to
separate classes” (per Re Metinvest BV [2016] EWHC 79 (Ch) at para 17 (“Metinvest”);
Re Telewest Communications plc [2004] BCC 342 at par 37 (“Telewest”); Re DX Holdings
Ltd [2010] EWHC 1513 (Ch) (“DX Holdings”)at para 5); and that in assessing class
composition, the court should consider whether there is more that unites the scheme
creditors than divides them (Telewest, at para 40; Apcoa, at para 107).
[67]       For its part, the first respondent deprecated the tendency in modern cases to
reformulate the test as laid down by the English Court of Appeal, and it cautioned against
this Court relying on dicta in cases where puisne judges sitting at first instance in the
Chancery Division have given their own worded summaries of the Court of Appeal’s
formulation, often without any opposition in schemes of arrangement, or proper argument;
and it cautioned this Court against relying on cases which were not argued by any opposing
party attending in the English Courts (it referred to the petitioners’ citations of Telewest, Re
Primacom [2013] BCC 201, Metinvest , DX Holdings Ltd, Re Hibu Group Ltd [2016] EWHC 1921
Page 41 ⇓
41
(Ch) (“Hibu”), Re Cooperative Bank plc [2017] EWHC 2112 (Ch) (“Co-operative Bank”) and Re
Lecta Paper UK Limited [2019] EWHC 3615 (Ch) (“Lecta”)).
Legal rights, not interests
[68]       It is important to note that at both stages of the test, the Court is concerned purely
with the legal rights of the relevant creditors as against the scheme company, not their
economic interests (UDL, at para 27; Re Primacom Holding GmbH [2013] BCC 201, paras 44 -
45.) (This is relevant as the petitioners argue that matters founded upon by the first
respondent as a relevant difference, eg the de facto blocking vote enjoyed by the first
respondent, are precisely such “interests” and not a matter of legal right.) The petitioners
note by way of illustration that the courts have assessed creditors’ existing rights in the
alternative counterfactual to the scheme in determining whether matters such as different
interest rates or maturity dates attaching to debt in fact give rise to a difference in rights or a
material difference in rights. (Re McCarthy & Stone plc [2009] EWHC 712 (Ch) (“McCarthy &
Stone”), at para 7; Re Primacom Holding, at paras 52 - 53; Co-operative Bank, at paras 9 - 14, 17.)
The first respondent submitted that the decision of Lord Millett in UDL makes clear (at
point (3)) that the relevant legal test relates to similarity or dissimilarity of legal rights, “not
on similarity or dissimilarity of interests not derived from such legal rights”. The first
respondent submitted that this means there is an outstanding question in English law to the
extent of interests that are derived from the relevant legal rights that would be relevant to
the class question. The first respondent submitted that the answer to that question is found
in Hawk (at para 30).
The comparator
Page 42 ⇓
42
[69]       Parties were agreed that the foregoing analysis entails consideration of the
comparator to the scheme, or the counterfactual of what will be the alternative if the
proposed scheme does not proceed. As was noted by one jurist eminent in this field,
Hildyard J, in Re Stronghold Insurance Co Ltd [2019] BCLC 11 (“Stronghold”) (at paras 48 to 51,
and especially at para 49).
“... only by identifying the comparator can the likely practical effect of what is
proposed be assessed and the likelihood of sensible discussion between the holders
of rights so affected and between them and others with different rights be weighed
fairly.”
[70]       Accordingly, the legal significance of the comparator is two-fold as it informs the
question of class composition. First, the comparator is relevant to ascertaining the nature
and substance of the creditors’ rights in the absence of the scheme. Thus, if the comparator
is an immediate liquidation (eg where the company has an urgent cash flow crisis), then
creditors’ rights must be assessed by reference to their rights in such a liquidation. (See, eg
David Richards J (as he then was) in Re T&N Ltd (No. 4) [2007] Bus LR 1411 (“T&N (No 4)”)
at 87 “In considering the rights of creditors which are to be affected by the scheme, it is
essential to identify the correct comparator.) In the case of rights against an insolvent
company, where the scheme is proposed as an alternative to an insolvent liquidation, it is
their rights as creditors in an insolvent liquidation of the company: see Hawk. Secondly, the
comparator is relevant to assessing whether creditors with different rights can consult
together in their common interest. Parties were agreed that, in the event of insolvency, this
will affect the assessment as to whether the creditors’ rights are sufficiently similar that they
can vote in a single class. As Hildyard J said in Apcoa at paragraph 52, the Court should
“postulate, by reference to the alternative if the scheme were to fail, whether objectively
there would be more to unite than divide the creditors in the proposed class”. In this
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43
context, the first respondent stressed the observations of Hildyard J in In Re Lehman Brothers
[2018] EWHC 1980 (Ch) (“Lehman (2018)”), (at paragraph 105) that:
“... the ‘comparator’ is always very important at both the second and the third
stage, as was recognised as long ago as the decision in Re English, Scottish and
Australian Chartered Bank [1893] 3 Ch 385 at 415, though it should not be used as a
solvent for all class differenceseven in a context where the alternative is insolvent
winding-up or its real likelihood (which will destroy value and negate any real
economic value in the competing interest): see Apcoa [117].”
The meaning of insolvency for the purposes of the comparator
[71]       What divided the parties was the definition or prospect of insolvency. As noted
above, the first respondent equated that with the statutory tests for insolvency in section 123
of the IA 1986. The petitioners contended for a more flexible approach. They argued that
there are a range of possibilities which lie between the two extremes of immediate
insolvency and profitable and successful trading as a going concern for the foreseeable
future. By way of example they cited Hildyard J’s use of “the possibility or real likelihood of
insolvency” as the comparator in Co-operative Bank (at paras 11 to 14). Hildyard J stated that
the comparator was a “possibility”, “real risk” or “real likelihood” of insolvency. In Lecta,
Zacaroli J followed Hildyard’s approach in Co-operative Bank (see para 13) and he used the
formulation that the company was subject to a “very real risk” of insolvency as the
comparator. The high point of this approach, from the petitioners’ perspective, is the
formulation in Hibu. In that case (as here), schemes of arrangement were proposed in order
to deal with certain legacy issues arising out of a prior restructuring in 2014. In describing
the comparators to the schemes (at paras 22 to 28), Warren J pointed out that “there is no
immediate prospect that the Group will enter into insolvency proceedings”, but that the
company would likely be unable to repay certain facilities (called PIK facilities) at their
scheduled maturity in 2024. He noted that:
Page 44 ⇓
44
“… The 2014 restructuring achieved its primary purpose of restoring the Group to
financial health.
Nevertheless, whilst there is no immediate prospect that the Group will enter into
formal insolvency proceedings, the 2014 restructuring created three legacy issues
which the 2016 restructuring is designed to address ...
... First, the PIK debt is too high. The company considers it unlikely that it will be
able to repay the PIK Facilities by 2024 in accordance with its obligations. There is no
immediate problem, but the issue does need to be addressed and it is considered best
to do so now in conditions of financial stability from the Group’s perspective.”
The fourth cases the petitioners cited in support of their approach to the assessment of
insolvency was Scottish Lion Insurance Co Ltd v Goodrich Corp 2010 SC 349 at 364 (“Scottish
Lion (2010)), in which the First Division stated (at para 44):
“The occasion for the presentation of an application for sanction may be where there is a
‘problem’ — in the sense of an adverse situation facing both the company and its creditors, or
a class of them, which requires to be resolved. The existence of such a problem may be a factor
in favour of the granting of sanction. But it is not, in our view, a precondition to the
sanctioning of a scheme, whether solvent or otherwise.”
[72]       The petitioners submitted that these authorities illustrate the range of the possible
comparators to a scheme. In each case, they argued, it is necessary to determine what the
likely factual position would be absent the scheme and to assess creditors’ rights against that
context. They submitted that, by contrast, the approach taken by ARCM is simplistic and
confused. ARCM draws a binary “black and white” distinction between “imminent risk of
insolvency” (on the one hand) and a “solvent comparator” (on the other hand). In relation
to the latter scenario, ARCM states: “Solvent companies require [sic] to comply with their
contractual obligations”. The petitioners submitted that such a crude approach has no basis
in law. It is wrong to say that merely because a company would not immediately go into an
insolvency proceeding if the scheme was not approved, it must be treated as solvent, and
the creditors’ rights assessed accordingly. They noted that ARCM’s position appears to be
Page 45 ⇓
45
that companies not at risk of immediate liquidation cannot undertake schemes of
arrangement varying their contractual obligations (as they would be thereby departing from
their contractual obligations) a proposition that was explicitly rightly rejected by the Court
in Scottish Lion (2010).
[73]       In the context of the comparator, they submitted that it is necessary to look at the
actual facts and commercial reality. As illustrated by Hibu, a company may be able to
continue performing its contractual obligations for a period of time, but may then be unable
to repay its debts at a particular date in the future. Accordingly, when identifying the
appropriate comparator, the Court obviously can and should consider whether the company
will be able to repay its debts in the future. The Court is not confined to asking whether or
not the company would go immediately into an insolvency proceeding if the scheme was
not approved and applying that single test by placing the comparator into either an
“insolvent” or “solvent” box.
[74]       The petitioners’ primary position was that the concept of cash flow insolvency under
section 123(1)(e) has nothing to do with schemes of arrangement under Part 26 of the 2006
Act. The comparator to a scheme is a counterfactual scenario which represents what will (or
may) happen if the scheme is not sanctioned. While proof of insolvency under section 123 is
one of the statutory preconditions for making a winding-up order against a company, the
petitioners submitted that the Court may conclude that the comparator to a scheme involves
a likelihood or a risk of an inability to repay debts in the future, even if the company is not
presently insolvent under section 123(1)(e).
[75]       However, they advanced a fall-back argument to the effect that even if the test of
cashflow insolvency in section 123 applied, the first respondent erred in its understanding
and application of it. The petitioners referred to the first respondent’s citation of BNY
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46
Corporate Trustee Services Ltd v Eurosail-UK-2007-3Bl plc [2013] 1 WLR 1408 (“Eurosail”). This
is the leading Supreme Court case on the definition of cash flow insolvency under
section 123(1)(e) of the Insolvency Act 1986 (“a company is deemed unable to pay its debts if
... it is proved to the satisfaction of the court that the company is unable to pay its debts as
they fall due”). They submitted that the test for cash flow insolvency under section 123(1)(e)
is much broader than ARCM is willing to acknowledge. In Eurosail, Lord Walker stated (at
para 37):
“The ‘cash-flow’ test is concerned, not simply with the petitioner’s own
presently-due debt, nor only with other presently-due debt owed by the
company, but also with debts falling due from time to time in the reasonably
near future. What is the reasonably near future, for this purpose, will depend
on all the circumstances, but especially on the nature of the company’s
business.”
In the present case, it is at least arguable that the Scheme Debt Facilities will fall due in the
“reasonably near future” (namely, May 2021). ARCM’s assertions about cash flow
insolvency are not accepted and were at least arguably based on a misapplication of the test
in Eurosail.
Distinguishing Stronghold
[76]       The petitioners sought to distinguish one of the cases on which ARCM placed
considerable reliance, that of Stronghold, where a solvent insurance company proposed a
scheme of arrangement. In that case, the Practice Statement Letter expressly stated that “in
the event that the scheme is not implemented, the current likely alternative is that the
company will continue in a solvent run-off”: see the judgment at para 60. The company
suggested that it might cease to operate as a going concern at some unknown time in the
future (as a result of an unspecified regulatory intervention), but failed to identify any point
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47
at which this might happen. That being so, Hildyard J concluded (at para 61) that “it is very
difficult to take liquidation as sufficiently imminent and likely to show the best
comparator”.
[77]       The petitioners submit that while that decision may well have been correct on its
facts, it provides no assistance in the present case. The facts of Stronghold are not the same as
those of the present case. In this case, the Group faces a specific and concrete maturity
deadline in just over a year. At that stage, the Scheme Debt Facilities (amounting to about
US $2.6 billion in drawn commitments) will become immediately due and payable. Unless
the Schemes are sanctioned, it is more likely than not that the Scheme Companies will be
unable to refinance or otherwise repay their debts at the scheduled maturity. These facts
form the relevant comparator in the present case. Thus, the relevant comparator is one
where, absent the Schemes, the Scheme Companies would continue in business for a period
of time but where they would more likely than not be unable to repay their debts at maturity
and would more likely than not go into insolvency proceedings. The relevant rights of the
creditors for the purposes of the class analysis are their rights in this scenario.
Deference to the view of the directors
[78]       Finally, in this context, the petitioners submitted that whenever there is a dispute as
to the appropriate comparator, the Court will generally defer to the views of the company’s
directors (who are in the best position to assess what will happen if the scheme does not
proceed). They referred to observations by Hildyard J in Apcoa, in support of that
submission:
“... there is often little dispute [as to the comparator], except perhaps as to the
imminence of actual insolvency; but as noted previously, there was
considerable dispute in this case. Although FMS [a dissentient creditor] put
in issue the reality of the threat, I concluded that I should accept the detailed
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48
evidence of the Scheme Companies (put in with regret on behalf of the
directors for obvious reasons) that the restructuring which the Schemes
enable and in part effect, and the new finance which Deutsche Bank has
offered conditionally upon the restructuring, is necessary if the Apcoa Group
is to trade solvently and successfully. I see no sufficient reason for doubting
the directors’ evidence that if the Schemes fail they will, under German law,
have to commence insolvency processes very soon thereafter.
There was some suggestion in FMS’s evidence that Centerbridge [a creditor
who supported the schemes] had too much to lose to allow this, and would
step into the breach at the last minute; but that implicitly invites a gamble or
an assessment as brinkmanship on the part of the court which I do not think
would be appropriate.”
[79]       In this case, the parties dispute whether the proper comparator of the Group is
insolvency; the difference arises from their differing definitions of what constitutes
insolvency. It is in this context that the first respondent contends for the statutory definition
of insolvency from IA 1986. It submits that the comparator in the present case will need to
be determined, first, by application of insolvency law and whether the Group is unable to
pay its debts, or likely to become unable to pay its debts in the senses used in section 23
Insolvency Act 1986 and Schedule B1, para 11 of the Insolvency Act 1986; and, second, by
assessment of the relevant facts of the case. By contrast, the petitioners contend for a
broader spectrum of insolvency. They submit, first, that there is a range of possibilities
between the two extremes of immediate insolvency and profitable and successful trading for
the foreseeable future (Hibu at paras 22 to 28; Lecta at para 13; Co-operative Bank at paras 11 to
14) and, secondly, that where there is a dispute as to the correct comparator, the court will
have due regard for the views of the company's directors (Apcoa, at para 71).
The relevance of fees or other collateral benefits to class composition
Page 49 ⇓
49
[80]       One of the points of contention was whether the fees payable (or other collateral
benefits) under the Schemes were relevant to class composition. There is no dispute that the
payment of fees under the scheme or wider restructuring to some but not all scheme
creditors may have impact on the class question. Both parties referred to the observations in
Re Noble Group Ltd [2018] EWHC 2911 (Ch); [2019] BCC 349 (Noble (no 1)”), at para 111, of
Snowden J (another distinguished jurist in this field):
“Any payments to a limited group of creditors in connection with a restructuring
can have a potential impact both upon the class question and upon the question at
the sanction hearing of whether, to the extent that the recipients of such payments
make up the majority voting in favour of the scheme, they are really
representative of the interests of the wider class of creditors as a whole. Of
necessity, therefore, the making of such payments carries with it a requirement for
full and frank disclosure to the Court throughout out the scheme process, together
with absolute transparency and disclosure to all creditors in the Explanatory
Statement.”
The petitioners point out that much will depend on the nature of the fees.
The need to safeguard against majority and minority oppression
[81]       There is a further factor important to the question of class composition, namely the
need to safeguard against both the majority and the minority oppression. This has long
been recognised by the courts. So, for example, in Hawk it was stated:
“When applying Bowen LJ’s test to the question ‘are the rights of those who are to be
affected by the scheme proposed such that the scheme can be seen as a single
arrangement; or ought it to be regarded, on a true analysis, as a number of linked
arrangements’ it is necessary to ensure not only that those whose rights really are so
dissimilar that they cannot consult together with a view to a common interest should
be treated as parties to distinct arrangements so that they should have their own
separate meetings but also that those whose rights are sufficiently similar to the
rights of others that they can properly consult together should be required to do so;
lest by ordering separate meetings the court gives a veto to a minority group. The
safeguard against majority oppression is that the court is not bound by the decision
of the meeting. It is important [that] Bowen LJ’s test should not be applied in such a
way that it becomes an instrument of oppression by a minority.”
The petitioners submitted that a holistic approach was required and that the first
respondent’s approach was a form of “salami-slicing” which artificially divided creditors in
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50
many classes, thereby increasing the risk of minority oppression. The first respondent
submitted that the Court should apply the correct test, which was dissimilarity, and must
guard against oppression by the majority in this case.
Discussion
[82]       In considering the many issues in this case, I propose to adopt the Buckley test as
recently reformulated by Snowden J in Re Noble (quoted at para [41], above). As I noted
above, in the Outline of ARCM’s challenges, some of their challenges are anterior
jurisdictional challenges. I propose to start by considering those before addressing their
other grounds of challenge.
ARCM’s anterior jurisdictional challenges
[83]       ARCM’s anterior jurisdictional challenges are that the Schemes go beyond a
compromise of pecuniary rights and so are outwith the Part 26 jurisdiction; that a scheme of
arrangement can do no more than re-arrange debt rights; that the Acquisitions are novel and
nothing similar has been provided for in other Part 26 schemes; that the changes to voting
rights are not ancillary to compromise of a pecuniary liability and that Schemes lack “give
and take”. The first respondent also described the loss of ARCM’s de facto blocking vote as a
“confiscation” (ie because it is “taken” without any “give” in return). It should be noted that
while it was ARCM which produced their Notes on Class to the Reporter, the Answers
opposing the Schemes was submitted by the first respondent (one of the funds under the
control of ARCM). The other parties drew no distinction between ARCM and the first
respondent and I adopt the same approach.
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51
Preliminary observations on the role of the Court and the approach to be adopted in consideration of a
Part 26 scheme
[84]       In considering the role of the court in a Part 26 application, I bear in mind Lord
President Clyde’s observations in Singer Manufacturing Co v Robinow 1971 SC 11, where he
observed (at pages 13 to 14) that:
“[t]he Courts have always interpreted [the then applicable statutory provision in the
Companies Act 1948] and its statutory predecessors broadly, so as to enable a wide
variety of arrangements to be put forward”. (Emphasis added.)
The English case law is replete with similar observations, an early and powerful expression
of which is found in the judgment of Fry LJ in Alabama, New Orleans, Texas and Pacific
Junction Railway Company [1891] 1 Ch 213 at LA 14 (“Alabama”) (at 246ff), a case he described
as “fully and earnestly argued”, where he stated that “the jurisdiction conferred by the Act
of 1870, and the words there are of the largest description” (emphasis added). At an earlier
point in the same case, Lindley LJ enjoined an approach that looked at matters “fairly as a
whole and [to] consider what there is in the state of this company which renders a scheme
necessary at all…” (at p 240).
[85]       Fry LJ’s observations in Alabama as to the role of the court in considering sanction of
a scheme are instructive. He began by noting (i) that the legislature has vested the discretion
in the majority of the class who are present at the meeting, and (ii) that it is not for the courts
to introduce restrictions on that, but to respect the power the legislature as conferred on the
majority of those meeting in each class. In relation to the court’s inquiry, he posed the
question (at p 247): “Under what circumstances is the Court to sanction a resolution which
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52
has been passed approving of a compromise or arrangement?”. While he wisely refrained
from an exhaustive list of the relevant factors, he had no doubt “that the Court is bound to
ascertain that all of the conditions required by the statute have been complied with; it is
bound to be satisfied that the proposition was made in good faith; and, further, it must be
satisfied that the proposal was least so far fair and reasonable, as that an intelligent and
honest man, who is a member of that class, and acting alone in respect of his interest as such
a member, might approve it”.
[86]       From these dicta, it is clear that the Courts have consistently interpreted
“arrangement” broadly to permit a wide variety of arrangements and that the approval of
the scheme proposed is pre-eminently a matter for the commercial judgement of those in
each class voting on it. While of course the Court must ensure that what is proposed falls
within the statutory language of “compromise or arrangement”, it is important to note how
carefully Fry LJ has articulated the Court’s role. It is, in a sense, limited to a consideration of
what is proposed within the parameters Fry LJ stated (an “intelligent and honest man…
might approve”) and premised on the proposal being “made in good faith”. Within those
parameters, the Court respects the commercial judgment of those meeting in the requisite
classes. The Court does not supplant the commercial judgement of the majority within each
class with its own view. This approach accords with the nature of the application to the
Court. What is sought is sanction of the scheme approved by the creditors or members in the
statutory meetings, not an adjudication on wider issues (eg a comparison of the scheme
proposed with possible alternatives and their respective commercial merits) involving
determinations of disputed fact. This understanding is also consistent with the description,
in modern cases, of the court exercising a “discretion” when it considers whether to sanction
a scheme approved by the creditors or members in the statutory meetings. It follows that a
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53
petition for the sanction of schemes under Part 26 is not a forum for the close or detailed
forensic examination de novo of the commercial merits of the proposed scheme, much less to
adjudicate upon alternative arrangements that might have been promoted. It is necessary to
stress this, because a significant amount of the ARCM Reports (and which formed part of
the rationale for the first respondent’s motion for a proof) was directed to just this sort of
enquiry.
[87]       As a generality and consistent with the observations of Lindley LJ in Alabama, the
Court considers the proposed arrangement as a whole (“…to look at the thing fairly as a
whole…”). This will inform the assessment of the object of the proposed scheme, against the
background of “what there is in the state of this company which renders a scheme necessary
at all”, and its consideration of whether the requisite “give and take” is present. On this
approach, the Court does not consider each constituent element of a scheme in isolation,
which at times reflected the first respondent’s approach (eg criticising the Acquisitions,
divorced from their function within the Schemes), and which the Supporting Creditors
referred to as “slicing and dicing”. In my view, this holistic approach is consistent with the
language of an “arrangement” (and which encompasses its constituent elements), and it is
also consonant with assessing the intended commercial purpose the proposed arrangement
seeks to achieve.
[88]       Furthermore, in respect of complex schemes, such as the Schemes, it is inapt to focus
on the individual elements of an arrangement (in disregard of their function within the
whole) where the constituent elements are expressly interconnected. The different elements
of the Schemes are strongly interdependent: the Acquisitions are predicated on a successful
equity raise; the improved RBL is dependent on the Acquisitions. Only if all three of these
elements are achieved, will the proposed amendments to the voting rights (and other
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54
changes in the Override Agreement) come into effect. In any event, a critique of individual
elements of a proposed arrangement without regard to their contribution to the overall
scheme and its objectives is, in my view, an approach divorced from commercial reality. So,
for example, the stated intention is for the benefit of the Acquisitions to flow through to the
Group’s Creditors: see the Explanatory Statement at para 5.18(A) at p 44. The overriding
purpose of the Schemes, and to which the constituent elements are directed, is to address the
debt wall. The object of the proposed refinancing is to obtain an extension of the debt
maturity. As the directors explain, the Scheme Creditors would not agree an extension of
the Scheme Maturity Date without addressing the debt wall. In its submissions, the first
respondent never fully engaged with the fundamental problem the debt wall poses, even
though this was recognised in some of the materials it produced (see eg the Boyle Report at
paras 5.5.5 and 5.5.10).
[89]       I turn to consider ARCM’s anterior jurisdictional challenges.
ARCM’s anterior jurisdictional challenge 1: Do the Schemes go beyond an “arrangement”
under Part 26?
Are the Schemes compromises or arrangements?
[90]       While the first respondent’s written submission consistently used the word
“compromise”, which is a narrower concept than “arrangement” (AI Scheme Limited
[2015] EWHC 1233 (Ch) at para 17), in oral submissions Senior Counsel for the first respondent
accepted that in these applications the Court was concerned with “arrangements” not
compromises. In my view, he was right to do so. The outcome of these Schemes, if granted,
do not result in a diminution of the Scheme Debt Facilities or of the interest rates payable, or
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in a diminution or alteration of the amount of a secured creditor’s security (which Fry LJ
considered to be likely to be “the most common kind of compromise or arrangement”: see
Alabama at p 246. Indeed, if granted, the Schemes will see all creditors benefit from an
enhanced interest rate (albeit to different degrees). Accordingly, I approach the Schemes on
the basis that what they propose are arrangements.
An “arrangement …between a company and… its creditors”
[91]       Section 899 of the 2006 Act confers jurisdiction on the Court to sanction “a
compromise or arrangement”. That form of words is found in section 895(2). However, the
statutory definition of “arrangement” in section 895(2) of the 2006 Act is patently not
comprehensive; it simply “includes” reorganisations of a company’s share capital (as might
arise in an arrangement between a company and its shareholders). The definition otherwise
provides no example or specified form of wording directed to inter alia an arrangement
between a company and its creditors. Further, I agree with the observations of Patten LJ in
Re Lehman Bros (No 2) [2010] Bus LR 489 (“Lehman (No 2)“) (at paras 58 to 61) that
“arrangement” is not considered in isolation, but in the context of the statutory phrase “an
arrangement between a company and its creditors”. In that case Patten LJ noted: “Although
‘arrangement’ is a wide expression, it is given content and meaning by the parties to it”.
Patten LJ concluded (at para 65) that an arrangement between a company and its creditors
must mean an arrangement which deals with their rights inter se as debtor and creditor. He
also concluded that an arrangement can include collateral releases proposed for the
disposition of the debts and liabilities of the company to its own creditors.”
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[92]       Notwithstanding the acceptance by Senior Counsel for the first respondent that each
Scheme proposes an “arrangement” and not a compromise (although the first respondent
contends that these Schemes go too far even for an arrangement), the first respondent’s
submissions often conflated “compromise” with “arrangement”. So, for example, the first
respondent argues that “the only subject matter that can be compromised is a debt claim, or
a claim that is parasitic on the debt such as security rights”. The dicta on which this
submission is based are (i) Patten LJ’s observation in Lehman (No 2) (at para 66) that a
“person is the creditor of a company only in respect of debts or similar liabilities due to him
from the company”, (ii) Lord Neuberger’s observations in the same case (at para 78) that if a
person’s claim cannot be said to render him a creditor or a member then the subject matter
of the claim cannot be covered by the arrangement; and (iii) the observations of Zacaroli J (at
paras 18 to 22) in Re Instant Cash Loans Ltd [2019] EWHC 2795 (Ch) (“Instant Cash (Sanctions
Hearing)”) that the arrangement jurisdiction was confined prima facie to the rights of the
company and its creditors inter se. The first respondent emphasised Zacaroli’s observation
(at the end of para 24 of Instant Cash (Sanctions Hearing), that:
“[i]t is within the scope of the scheme jurisdiction to impose such a term [compelling
a landlord to accept the tenant’s surrender of the lease] on a creditor only if it is
ancillary to the compromise of the pecuniary liability or necessary to ensure
effectiveness of the compromise effected by the scheme”.
The first respondent’s overarching submission was that non-pecuniary rights fell outwith
the jurisdiction in Part 26 of the 2006 Act.
The first respondent’s challenge based on “pecuniary rights”
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[93]       One of the principal bases on which the first respondent argues that the Schemes
exceed what is an “arrangement” within the scope of Part 26 of the 2006 Act is that neither
the proposed “confiscation” of Override Agreement voting rights, nor the “forced” approval
of the proposed Acquisitions, are compromises of “pecuniary rights”. Nor are they
“ancillary to the compromise of the pecuniary rights or necessary to ensure the effectiveness
of the compromise” of pecuniary rights (Instant Cash Loans Ltd at paras 18 to 20). (These are
the first respondent’s challenges in [28(1), (2) and (3)], above.) Accordingly, so this
argument runs, the Schemes go beyond the proper jurisdiction conferred under Part 26.
Rights which may be subject to an arrangement between a company and its creditors are the rights
inter se as debtor and creditor
[94]       In considering the first respondent’s anterior jurisdictional challenges, I proceed on
the footing that an “arrangement” between a company and its creditors that falls within
Part 26 must mean an arrangement which deals with their rights inter se as debtor and
creditor.
[95]       What are the rights of a creditor? The defining quality of a creditor is an entity to
whom the company owes a debt, an obligation to pay a money sum. The corollary right
vested in the creditor is for that debt to be repaid. A creditor may have ancillary rights
arising from that principal obligation: eg such as receipt of interest or payment by a
specified point in time (ie a maturity date). Equally, the debtor may have granted certain
warranties and covenants, designed to protect against the erosion of the debtor’s financial
position (and thereby diminishing the prospect of the creditor being repaid in full in due
course). Clearly, a debtor’s creditor is entitled to enforce these kinds of provisions and it
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will have a claim against the debtor company if they are breached. Under more complex
arrangements, a significant creditor or the creditors as a collective may be entitled to exert
controls over certain decisions or acts of the debtor. These can include restrictions on
significant corporate actions. These obligations are imposed by the creditor on the debtor
(and which confer correlative rights for the creditor) with a view to increasing the prospects
of its debt being repaid. A scheme of arrangement under Part 26 is one form in which such
rights may be formalised and imposed, even on dissentient creditors, so long as the Court
has been satisfied that the statutory test has been met and has sanctioned the scheme. That
is precisely the circumstance that obtains between the Group and the Scheme Creditors
consequent upon the 2017 Refinancing.
[96]       It is helpful therefore to start with the nature and source of the rights which the
Schemes propose to amend.
The source and substance of the Scheme Creditors’ voting rights
[97]       In relation to the source of the Scheme Creditors’ voting rights, those rights were
defined in clause 23 of the 2017 Override Agreement pursuant to the 2017 Scheme
sanctioned by this Court. Prima facie these contractual rights were within the Part 26
jurisdiction. Or, at least, the parties to that arrangement (which included ARCM) accepted
at that time that, for example, contractual provisions defining voting rights fell within the
2017 Scheme. While the fact that the voting rights were conferred in the 2017 Override
Agreement is not determinative that such rights properly fall within the scope of an
“arrangement” under Part 26 (the 2017 Schemes were not opposed, and so there was no
dissentient creditor to take the point), it is nonetheless the case that the voting rights in the
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2017 Override Agreement were conferred on the Scheme Creditors qua creditors of the
Group; they did not arise from any other context or relationship. The voting rights are
exercisable in relation to defined matters; in substance, these relate to matters that could
affect the financial position of the Group and, therefore, the prospects for repayment of the
Scheme Debt Facilities. More fundamentally, the voting rights are exercisable by virtue of
the debt instruments the creditors hold. They are weighted according to the quantum of the
Group’s indebtedness to the individual creditor under each debt instrument. Accordingly,
leaving aside the absence of any challenge in the 2017 Schemes to the inclusion of the voting
rights within the 2017 Override Agreement, it is nonetheless the case that the voting rights
in clause 23 of the 2017 Override Agreement were conferred on the Scheme Creditors as
creditors of the Group. In my view, the voting rights, together with other terms of the
Override Agreement, as one of the finance documents, is clearly an incident of the debt
owed to the first respondent qua creditor. Accordingly, the amendments to the voting rights
which the Schemes contemplate are permissible under a Part 26 scheme and I reject this
aspect of the first respondent’s anterior jurisdictional challenge.
[98]       I am fortified in this view by other contexts in which creditors are afforded voting
rights qua creditors. In other words, the provisions in the 2017 Override Agreement for the
Scheme Creditors to exercise voting rights qua creditor are not anomalous. In formal
insolvency regimes, there is statutory provision for creditors’ views to be expressed on
certain decisions. This takes the form of their votes (which, for certain purposes, are
assessed by a weighting related to the quantum of the debt owed). Quintessentially, the
creditors enjoy these voting rights by virtue of their status as creditors. Accordingly, voting
rights as an attribute or right of a creditor is well recognised. The first respondent did not
offer a definition of a “pecuniary right”, but the voting rights the Scheme Creditors enjoy by
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virtue of the 2017 Override Agreement are clearly incidental or ancillary to the indebtedness
of the Group to the Scheme Creditors. The voting rights arise inter se the Group and the
Scheme Creditors as debtor and creditors, respectively. Accordingly, in my view the
proposed amendments to the 2017 Override Agreement voting rights which may follow
from the sanction of the Schemes is permissibly within an “arrangement” under Part 26.
While, perhaps, more pertinent to the fairness of the Schemes (which I consider below) and
commensurate with a holistic approach, it is convenient here to note that, as explained in
Rose 1 (at paras 117 to118), amendments to the voting rights in the 2017 Override
Agreement was one of the creditors’ conditions of support for the Schemes.
[99]       Another aspect of the first respondent’s challenge to the proposed changes to the
voting rights is that it amounts to a confiscation, which I consider below, under the rubric
Do the Schemes lack ‘give and take’?”.
Do the Schemes impose new obligations?
[100]       The first respondent argues that, if granted, the Schemes impermissibly impose new
obligations on the RCF lenders (of which ARCM is one, but not the sole RCF lender) in
respect of the undrawn facility during the period of the debt extension (“forcing presently
undrawn amounts to be available to draw in the future”, per para 60 of the First ARCM
Note), and which will be on new terms (described at para 64 of the First ARCM Note as
forcible new lending on entirely different and new terms from May 2021 to November
2023…, with a new lending relationship upon wholly different terms to the present
relationship”) (emphasis added).
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[101]       I begin by considering the question, does the extension of the maturity date of the
RCF result in “new lending” in respect of the present undrawn element of the RCF? It may
help to recall that an RCF is, as its name suggests, a credit facility in which, so long as the
credit limit and other conditions are observed, the debtor (here, the Group) may draw down
and repay the facility as it chooses. It is “revolving” because the amount due to be repaid at
any time will vary, and may increase and decrease. It is the functional equivalent of an
overdraft facility on a current account. The corollary of the debtor’s right to drawdown and
repay at its option, is the creditor’s obligation to make funds available (or to honour the
drawdown) up to the permitted limit (again, so long as the other terms of the RCF are
complied with or any breach thereof waived). In respect of any undrawn amount, the
creditor is contingently liable; but it is a creditor nonetheless because the underlying lending
commitments already exist. Here, there is an established relationship of debtor and creditor
between the Group and the RCF Scheme Creditor; the Scheme Creditors holding RCF debt
instruments have a subsisting obligation to lend up to the agreed amount. While the RCF
Scheme Creditors are contingent creditors in respect of any undrawn amount, properly
analysed their obligation to honour or provide the undrawn element of the RCF is an
existing obligation. It is not a “new” one imposed by the Schemes.
[102]       Is the liability of the Scheme Creditors under the RCFs on “on entirely different and
new terms”? In my view, there is no substance to this submission. The Scheme Debt
Facilities have not been increased and the principal sums owed to the Scheme Creditors
remain the same. In relation to the extension to the maturity date (if this is contended
separately to constitute a new obligation or “entirely different terms”), in my view this does
not amount to a new obligation or one on wholly new terms. It is a variation of an existing
term the date by which the Group must repay the Scheme Debt Facilities. It does not
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relieve the Group of the obligation of repayment; much less does it diminish the amount to
be repaid (cf a compromise). I am fortified in this view by the case of Apcoa, in which
Hildyard accepted (at para 167) that a debt extension or rollover of an existing RCF did not
constitute a new obligation or new contract. That is what is proposed in the Schemes. The
maturity extension will simply roll over the existing RCF available to the Group (including
any undrawn element) without imposing any new or more extensive obligations on the RCF
Scheme Creditors. I accordingly reject the contention that the first respondent (or ARCM) is
not a creditor in respect of the undrawn element of the RCF or that the undrawn element of
that becomes a “new debt” during the period of the debt extension. It follows that I reject the
first respondent’s submission that the RCF lenders constitute a distinct class for the
purposes of class composition because of the “imposition of new positive obligations in the
form of future advances” (per the first respondent’s Submissions at para 75).
[103]       The petitioners note that a similar “new obligations” point arose in the recent
challenge to the Debenhams CVA (creditors voluntary arrangement): see Discovery
(Northampton) Ltd v Debenhams Retail Ltd [2020] BCC 9 (“Debenhams”). While that case
involved a CVA under section 1 of IA 1986, which makes provision for a procedure similar
to that under Part 26, it was accepted in Debenhams (at para 100(a)) that there is no relevant
difference between a CVA and scheme under Part 26. The jurisdiction under Part 26 in
respect of a scheme and under section 1 of IA 1986 are sufficiently close that the court
exercising one jurisdiction can read across cases from the other. Indeed, as will be seen, the
court in Debenhams referred to cases arising under Part 26. The feature of the CVA giving
rise to the “new obligation” challenge was the proposal requiring landlords to accept a
reduced amount of rent for a period of five years. A group of creditors challenged this as
impermissibly imposing a new obligation on landlords, as, it was argued, the landlords
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were required to make their premises available to the company on different terms from
those which they had originally agreed. Norris J rejected this argument. He stated (at
para 78):
“In my judgment the CVA does not impose ‘new obligations’, save in the sense that
it varies existing obligations. But variations of existing obligations are
‘arrangements’ of the company’s affairs which it is the very object of Part 1 of the
Act [ie IA 1986] to enable. The landlord was and is obliged to permit quiet
enjoyment of the demised premises for the duration of the term granted: the
covenants (upon breach of which the landlord can put an end to the term) have been
varied (because the rent has been reduced).”
After citing dicta from Apcoa and Noble (at paras 79 and 80) on the imposition of new
obligations through a scheme, Norris J continued at [81]:
“In my view these observations do not cast any doubt on what is proposed in the
instant case. What is proposed here is a variation of an existing obligation binding
the company and its creditor, not the creation of a new contract requiring the
assumption of fresh liabilities to some new third party.” (Emphasis added.)
That same distinction between the imposition of a new obligation on a creditor and the
variation of an existing obligation owed by the company applies to the Court’s consideration
of schemes under Part 26.
[104]       Applying that analysis to the changes proposed in the Schemes which ARCM
challenge, it reinforces my view that the undrawn element under the RCF does not
constitute a new obligation. The sums ultimately to be paid to the Scheme Creditors under
the Scheme Debt Facilities have not changed. The debt extension simply varies an existing
term. The obligations of the RCF creditors in respect of undrawn funds do not result in an
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increase in the quantum of those facilities. The first respondent’s new challenges to these
features of the Schemes as impermissibly imposing new obligations fails.
[105]       There is another feature of the Schemes which ARCM argue will result in
impermissible new obligations on the RCF creditors. This relates to the partial re-
designation of certain commitments under the Senior RCF. The proposed amendment to the
Senior RCF will permits the borrowers to re-designate a proportion of the commitments
under the cash facility as an additional commitment under the letter of credit sub-facility.
The context is that under the credit sub-facilities the Group can call upon the creditors to
issue letters of credit in respect of decommissioning liabilities (these relate to the Group’s
North Sea assets). However, the re-designation does not increase the overall lending
commitments of any lender under the Senior RCF: it substitutes some of the re-designated
letter of credit facility for the cash facility. (The petitioners submit that a creditor’s
obligation under a letter of credit, which is a contingent liability to the beneficiary, is less
onerous than the upfront provision of cash under the cash facility.) In my view, ARCM’s
new obligation challenge to the proposal to enable a partial re-designation of an RCF is also
without merit. For completeness, I note that it is also one change which does not affect
them. Mr Rose explains (in Rose 1 at paras 194 to 195) that ARCM’s commitments under the
cash facility will not be susceptible to re-designation as additional letter of credit facilities.
In any event, none of the creditors whose facilities might be subject to partial re-designation
has objected to the Schemes on this ground.
The novelty of the Acquisitions
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[106]       The first respondent is critical of the Acquisitions, which it says are novel in the
context of a Part 26 scheme and that it is not within the Court’s jurisdiction to force the
Acquisitions upon it (and ARCM). Closely allied to this are the first respondent’s criticisms
that the Acquisitions will materially change the balance of the Group’s energy production
(weighting it significantly more toward gas than oil) and bring in its train significant
decommissioning liabilities.
[107]       In relation to the novelty of the Acquisitions (neither the petitioners nor the
Supporting Creditors demurred from that description), novelty itself is not a jurisdictional
bar. I have already noted above the observations of the Courts, English and Scottish, which
decline to set limits ab ante as to what may constitute an “arrangement”. I approach this
issue as a matter of analysing the features and effect of the Acquisitions in light of that case
law.
[108]       The terms of the 2017 Override Agreement preclude the Acquisitions, unless the
requisite majorities of the creditor classes entitled to consider this grant a waiver. As the
Group has not been able to secure the waiver, it seeks that as part of the Schemes.
Accordingly, the mechanism adopted is to permit the Group to grant that waiver on behalf
of the Scheme Creditors under powers of attorney (which gives rise to the power of attorney
issue). However, in this context, it is significant that, strictly, none of the Scheme Creditors
will become a party to the agreements by which the Group may acquire the Acquisitions;
none will be constituted owners of these assets. Testing this in the language of Norris J in
Debenhams, the Acquisitions do not require the Creditors to assume “fresh liabilities to some
new third party”.
[109]       In relation to the first respondent’s criticisms of the merits of the Acquisitions (for
that is what the critique amounts to), this is quintessentially a question of commercial
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judgement. That is a matter for the directors of the Group, and which has been subjected to
scrutiny by the Scheme Creditors in Scheme Meetings. The Group’s views as to the
purposes the Acquisitions are to serve are supported by the PWC Report and also by the
advice from Rothschild. On this matter, the Scheme Creditors have spoken, approving the
Schemes overwhelmingly. Further, the first respondent’s critique fails to have regard to the
role of the Acquisitions in the overall scheme of the Schemes. The Acquisitions are not
pursued as an end in themselves; in the directors’ judgement, the Acquisitions are critical to
unlocking funding or liquidity in the form of RBL. While there are criticisms of the
assumptions on which the amount of funding is predicted (ARCM and the first respondent
deploy the ARCM Reports to contend that these are overly optimistic in respect of reserves
and under estimate the downsides), there is no challenge to the need for increasing liquidity
or to the mechanism of RBL as the means to tap this). For the reasons I have provided
above, disputes about the commercial merits of the Scheme (or an alternative arrangement
preferred by a minority creditor) are not apt in Part 26 proceedings.
ARCM’s anterior jurisdictional challenge 2: Do the Schemes lack “give and take?
[110]       I have already considered ARCM’s challenge that the voting rights are not pecuniary
rights or ones which may permissibly be included within the scope of a Part 26 scheme. A
different facet of ARCM’s attack on the change to the Scheme Creditors voting rights is the
complaint that this amounts to a “confiscation” and the loss of their de facto blocking vote
(“veto”) ARCM (but not the first respondents) enjoy by virtue of the amount of debt ARCM
holds within two of the creditor classes, but for which they receive nothing in return.
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The degree of compulsion under Part 26
[111]       As some of the quotations from ARCM’s Note and Supplementary Note on Class
disclose, ARCM characterise what is proposed in language that is, at times, emotive: eg the
“forcible” new lending, the “confiscation” of voting rights. It is necessary to address these
characterisations, as they go to the very nature of the Part 26 jurisdiction. Lest it be
suggested that Norris J’s observations in Debenhams (quoted above) are inapposite (he stated
that “variations of existing obligations are ‘arrangements’ of the company’s affairs which it
is the very object of Part 1 of the Act [ie IA 1986] to enable”), the Inner House make the same
observations in Scottish Lion (2010) (at para 46):
“The respondents, for reasons which are readily understandable, would prefer to
retain their existing contractual rights. But the loss of these contractual rights cannot
be said a priori to be something which would disable the court sanctioning the
scheme. It is of the very nature of the power conferred on the court under s.899
that, provided the statutory majorities are properly obtained and the requisite test
for the granting of sanction satisfied, contractual rights will, notwithstanding
opposition by persons in right to them, be varied or extinguished.” (Emphasis
added.)
Those observations, which are binding on me, confirm that, provided the statutory
majorities are properly obtained and the requisite test for the granting of sanction is
satisfied, contractual rights may be varied, notwithstanding the opposition of a creditor
affected by those variations. The element of compulsion (or “confiscation”) ARCM object to
flows from the exercise of the court’s own powers to sanction the scheme. The minority
creditors may regard that as “forcible”, but that is a consequence of the jurisdiction the
Court exercises under Part 26; it is not a basis for challenging the exercise of that power.
Accordingly, a complaint against the Court’s power to sanction schemes under Part 26 in the
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face of dissentient creditors is not a legitimate ground of opposition. Were it otherwise, the
Part 26 jurisdiction would be incapable of giving effect to any meaningful variation of
creditors’ rights.
[112]       In considering whether there is a want of “give and take”, it is convenient here to
consider whether ARCM have been treated differently than the other creditors in respect of
the proposed amendments to their voting rights under the Schemes, or whether those rights
are immutable (as appeared at times to be ARCM’s position).
[113]       At times ARCM’s submission amounted to the contention their voting rights are
sacrosanct; that it was illegitimate on the part of the petitioners to resort to the Part 26
jurisdiction when it was not insolvent; or that that constrained the nature of a scheme that
could be promoted or the Court’s role. In my view, the voting rights are simply contractual
rights. They do not acquire some other complexion, making them immutable or beyond the
reach of any future Part 26 scheme, because they resulted from the 2017 Schemes. Another
way ARCM advanced this was to suggest that they had only agreed to the rights as stated in
the 2017 Override Agreement because they were promised that these would be the basis for
the relationship going forward. The Supporting Creditors point out that ARCM have
produced nothing to support such a contention. The petitioners’ response is that even rights
consequent upon a Part 26 scheme (ie the 2017 Schemes) do not render them immutable. In
my view, there is force in these submissions. In any event, any expectation ARCM might
have would founder on the fact that at the time the 2017 Schemes were promoted, it was
well understood that it was an incremental step towards the Group’s improved financial
health, not the cure itself.
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Are ARCM or the first respondent being treated any differently in the amendments to their voting
rights?
[114]       I did not understand ARCM to argue that there was a degree of discrimination in
respect of amendments to their voting rights, so much as the loss of their de facto veto they
have because of the size of their holding in two of the creditor classes. (Neither the
petitioners nor the Supporting Creditors took the point that this argument is not, strictly,
open to first respondent to advance in its own right, as their debt holding is too small. In the
discussion of this issue it is obviously the debt holding of ARCM which is under
consideration.)
Voting right changes
[115]       The creditors’ voting rights put in place by the 2017 Refinancing are complex. These
are described more fully in the petitioners’ Notes on Class at paragraphs 124 to 129. In brief,
amendments and waivers (eg of events of default) are divided into seven categories
(corresponding broadly to debt instruments, and collectively described as the Private
Creditor Groups), each with different consent thresholds. ARCM have a de facto blocking
vote in respect of two of these voting groups (the Converted Group and the Term Loan
Group), because it holds enough to preclude the other creditors within these classes from
achieving the requisite majorities. It should be noted that, as the petitioners observe in their
Note on Class, ARCM are not the only Scheme Creditor with a de facto blocking vote. Lloyds
Bank plc has a blocking vote under the Term Loan Facilities, and in fact all the Private
creditors have a veto in respect of those forms of consent that require unanimity.
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[116]       I accept as correct the petitioners’ analysis of clause 23 of the 2017 Override
Agreement and its amended form if the Schemes are sanctioned (and the amended form of
clause 23 takes effect), which is that each Private Creditor Group (and each individual
Private Creditor) has materially the same legal rights under either the existing or proposed
voting regimes. So, for example, as matters stand under the current provisions of the 2017
Override Agreement, no Private Creditor Group has a special or unique veto position that
differs from other Private Creditor Groups to veto amendments or waivers under
clause 23.2. Similarly, each Private Creditor (viewed as an individual rather than a group),
has a like right to vote on amendments or waivers under Clause 23.2.
[117]       Turning to the amendments to the voting rights proposed under the Schemes, the
proposals include a waiver of any breach of covenant or event of default arising out of the
Acquisitions. The mechanics of this are that each Private Creditor Group (and each
individual Private Creditor) will relinquish their right to block the Acquisitions under
Clause 23.2. Further, the Schemes will amend the voting regime under clause 23.2 by
eliminating the veto position of each Private Creditor Group and allowing certain
amendments to be made by Private Creditors holding two-thirds of their total commitments.
It is this change that removes ARCM’s de facto veto in the Converted Group and Term Loan
creditor classes. The petitioners’ position is that this change will affect each Private Creditor
Group and each individual Private Creditor in the same way. They observe that no one will
be singled out for special treatment: the veto ability of each Private Creditor Group will be
lost, and each dollar of debt held by each individual Private Creditor will continue to carry
the same right to vote. I did not understand ARCM to contest this reading of clause 23 in its
existing or amended form.
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[118]       Returning to ARCM’s arguments about the confiscation of voting rights and the lack
of something in return, so far as I understand this argument, it is premised on the contention
that the first respondent’s voting rights will be altered, regardless of the outcome of the
other elements of the Scheme. However, this submission does not accurately reflect the
conditionality and the sequential nature of the different elements of the Schemes. It suffices
to note that the amendment to the voting rights does not take effect immediately, as ARCM
appeared to contend. These provisions (including the change in clause 23 to the voting
rights) will take effect, only if the series of transactions (the equity raise, the Acquisitions
and the additional financing from RBL) complete. More specifically, it is only upon delivery
of the A&E effective notice to the lenders (which brings the extension of the Scheme Debt
Maturity into effect), that the proposed changes to the Override Agreement take effect,
Considering the Schemes as a whole (and assuming their different elements take effect),
there is give and takeand of which the amendments to the voting rights form part. In any
event, even if the voting rights were amended upon sanction of the Schemes (rather than
consequent of satisfaction of certain elements of it) and fall to be considered in isolation, the
Scheme Creditors’ voting rights in the 2017 Override Agreement are not taken away without
replacement; they are replaced with a different set of voting provisions. Something is given
back, even if it is different in form. Whether the first respondent is content with that is not a
jurisdictional question.
[119]       That suffices to resolve ARCM’s jurisdictional challenge predicated on the treatment
of their voting rights. In my view, there is no “take” without “give”; and there is no
difference between ARCM and the other Private Creditors in respect of what is “taken” from
them. There is no wholescale removal of voting rights. There is a variation of these rights,
but, as a matter of legal right, that is applied equally to each of the Private Creditor Groups.
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[120]       To the extent that ARCM’s challenge that there is no “give and take” may be
predicated on other features of the Schemes, it was not clear if other elements of the Schemes
are subject to ARCM’s anterior jurisdictional challenges. However, I accept the petitioners’
submission that in assessing whether there is the requisite give and takeit is necessary to
consider the proposed scheme as a whole. For that purpose, it should be noted that apart
from the benefits it is hoped that the Acquisitions will bring in their train, the Scheme
creditors will also receive the enhanced interest or coupon rates. The financial elements of
the Schemes are set out in the Explanatory Statement (at paragraph 5.19 (see p 583)). I will
address the arguments focused on the interest rates for the Scheme Creditors below, but in
this context, it suffices to note that Mr Rose confirms (in Rose 1 at para 182) that all creditors
will receive a positive return from the Schemes.
[121]       Accordingly, considering the Schemes as a whole, in my view there is the requisite
give and take. That element of “give” is sufficient to dispose of this argument, as it is not a
requirement of an arrangement that each individual right of a creditor that is altered or
restricted by the arrangement must be counterbalanced by an exactly matching benefit.
[122]       I turn now to consider ARCM’s remaining challenges using the four stages of the
Buckley test as a framework to do so (see para [42], above). At stage 1 of Buckley, the Court
considers whether the procedures in the statute have been complied with; whether the
statutory majorities were obtained; and whether an adequate explanatory statement was
provided to the creditors. The challenges falling within stage 1 are ARCM’s challenges to
the Explanatory Statement and to class composition.
ARCM’s challenges falling within stage 1 of Buckley: (1) Was the Explanatory Statement
adequate?
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The directors’ duties and the standard required of an explanatory statement
[123]       The statutory requirement in section 897(2) of the 2006 Act is that the explanatory
statement “must... explain the effect of the …arrangement”. This is described in the case law
as the Court requiring to be satisfied “as to the adequacy and accuracy” of the explanatory
statement” (per Lehman Brothers [2018] EWHC 1980 Ch (at para 67)). While the parties refer
to different dicta, the directors’ duty in respect of an explanatory statement is to place before
the members or (as here) the creditors “sufficient information for them to make a reasonable
judgment” on whether the proposed scheme is in their commercial interests (per Snowden J
in Re Indah Kiat [2016] EWHC 246 (Ch) (at para 41); which is based on the observations of
Sir David Nicholls VC in Re Heron International NV [1994] 1 BCLC 667 at 672 to 673) ARCM’s
position is that it’s disputes are not complaints about commercial judgment, but that it
disputes that the Explanatory Statement gave the creditors sufficient information to make a
reasonable judgement (see para 105 of the First Respondent’s Submissions).
ARCM’s criticisms of the Explanatory Statement
[124]       In addition to the Explanatory Statement’s lack of clarity on class comparator or the
extent of fees being paid, ARCM submit that the Explanatory Statement is deficient in the
following respects:
1) it fails properly to explain the risks inherent in the proposed Acquisitions
(including “insufficient disclosure” of increased decommissioning liabilities)
and there is a failure to consider the likelihood of early cessation of
production from them;
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2) there is “inappropriate” reliance on oil and gas price forecasts;
3) it is misleading in respect of the pre-tax cash flows that can be expected
(reference is made to “more realistic” assumptions used by Dr Okongwu) and
which undermines the business case for the Acquisitions.
There was a separate criticism, not related to the merits of the Schemes, that ARCM’s
position had been mischaracterised. Reference is made to the ARCM Materials to support
different assumptions or alternative forecasts and which are essentially said to be more
realistic (eg references to the Fuller and Okongwu Reports for oil and gas forecasts and
prices, for the effect of reliance on the UK gas market and for decommissioning liabilities;
and the early cessation of production from the Acquisitions). The thrust of these criticisms is
to attack the Schemes’ reliance on the Acquisitions to refinance the Scheme Debt facilities
and in respect of which, it is said, the Explanatory Statement so fundamentally understated
the “significant risks” such that the creditors could not have given their informed consent to
the Schemes.
The petitioners’ response
[125]       The petitioners point out to the numerous caveats, warnings and identification of
risk factors contained in the Explanatory Statement. These included: the caveat in respect of
the uncertainty of forecasts relating inter alia to interest rates, oil and gas prices, foreign
currency fluctuations and business trends (at pages 20 to 21); the large number of risk factors
relevant to the Schemes, and especially the Acquisitions (eg at page 98, “However, these
expected financial benefits [ie from the Acquisitions] may not arise and the other
assumptions upon which [PO] determined the considerations may prove to be incorrect”);
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the recognition of the uncertainty in estimating the reserves, production and
decommissioning liabilities inter alia of the Acquisitions (at pages 103 to 105); and the risks
arising from the volatility of energy prices in the market (at page 108).
[126]       The petitioners also note that the criticisms ARCM made of the Acquisitions in the
latter part of 2019 were fully narrated and responded to in the Explanatory Statement (see eg
at paras 7.3 and 7.4). They also challenge much of the ARCM Materials: eg, they challenge
Mr Fuller’s ability to comment in any meaningful way on the Explanatory Statement (see the
comments in their Note on Class)) or on his view that his set of forward curve pricing
assumptions are “correct”; they challenge the relevance of Dr Okongwu’s assessment of the
commercial benefits and disadvantages of the Schemes. Rose 2 contains a more sustained
response and refutation of the ARCM Materials.
[127]       The petitioners also make the point that the Group has operated in the energy sector
since 1934; it has conducted other acquisitions and is familiar with the obligations of due
diligence. In relation to the Acquisitions, which ARCM oppose, the Group has a track
record of operating assets close to the end of their productivity and in deferring their
cessation and maximising their productivity (Rose 2 at para 59(A)). The Group also has
“extensive experience” in preparing decommissioning forecasts. It was noted that Mr Rose
made the further point (at Rose 2, para 60) that the decommissioning liabilities have been
fully discounted from the purchase price and that, given the Group’s experience in
extending the life and recovery from aging North Sea assets, it sees this as an opportunity.
[128]       In relation to criticisms of the corporate model, the petitioners note that the Group
prepared the 2017 Explanatory Statement using the same corporate model and which was
not subject to the objections as are now made. The Group had made its corporate model
available to all private creditors. Mr Rose’s response (in Rose 2) to Mr Prest’s criticism that
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the PWC Report was lacking in independence is that PWC nonetheless reviewed the
Group’s RBL assumptions, and they confirmed that these were all within a reasonable range
(see PWC Report at p 59). Furthermore, PWC were supported in this view by other expert
analysts, namely Rothschild and DNB. PWC did not consider the assumptions in respect of
the Acquisitions, including the reserve assumptions and decommissioning liabilities, as
these are outwith PWC’s expertise. These were verified by the Group. In relation to
Mr Ercil’s complaint about mischaracterisation, Mr Rose doubts whether the matters
Mr Ercil identifies had any impact on the decision of the Scheme Creditors to vote for the
Scheme. He notes that ARCM set up its own website setting out its own position and posing
certain questions for the Group, though none of these was posed at the Scheme meetings.
No other Scheme Creditor has made any complaint about the inadequacy of the Explanatory
Statement.
[129]       Finally, in relation to the Explanatory Statement, the Supporting Creditors point out
that the Scheme Creditors were a large, multi-party group comprised mainly of
sophisticated financial institutions and investors. The Supporting Creditors submit that the
large majorities voting in favour of the Schemes belie the suggestion that the Explanatory
Statement was inadequate or that the Scheme Creditors had any doubts as to the sufficiency
of the information it provided. They make the further point, more appropriately for them
than the petitioners, that notwithstanding the volume of the ARCM Reports, the Supporting
Creditors continue to support the Schemes. Accordingly, the court could be satisfied that
any alleged deficiencies in the Explanatory Statement would not have made any difference
to the outcome of the Scheme Meetings.
Consideration of whether the Explanatory Statement was of the requisite standard
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[130]       In considering the criticisms of the Explanatory Statement it must be borne in mind
that the purpose of the Explanatory Statement is to present the Group directors’
presentation of the benefits, disadvantages and purposes of the scheme proposed as they see
it. Here, the Schemes are complex arrangements. The Explanatory Statement is extremely
detailed. It totals 583 pages (of which 450 are the appendices). Notwithstanding its length,
its presentation of the Schemes is clear and intelligible and the format of the Explanatory
Statement (including its provision of defined terms, contents and its division into discrete
headed sections) is accessible, well-ordered and readily navigable. The amount of
information provided is commensurate with the complexity of the Schemes. It is recognised
that in a case of great complexity not every relevant fact can be stated (per Maugham J in Re
Dorman Long and Co Ltd [1934] Ch 635 at 665 to 666; see also the comments of Neuberger J (as
he then was) in Re RAC Motoring Services Limited [2000] 1 BCLC 307 at 328). The nature of
ARCM’s criticisms is not so much that there are omissions, but that ARCM fundamentally
disagree with the Group directors’ views of the business case for, and benefits of, the
Acquisitions. The ARCM Materials are directed at supporting those criticisms and, to a
large extent, repeat (in this context) the criticisms of the Schemes they have advanced under
other headings.
[131]       In reflecting on the proper approach to these criticisms, I note that the Courts have
long recognised that there is ready scope for arguments that the directors should have
expressed themselves more fully or differently in their explanatory statements. It is in
relation to those sorts of criticisms that Clauson J (sitting in the Court of Appeal) stated in Re
Imperial Chemical Industries Ltd (“Imperial”) (at p 617) that:
Where the matter is one of difficulty, the Court will always scrutinize such a
circular very carefully; but where, as in this case, there is no suggestion that the
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directors were doing otherwise than honestly putting forward to the best of their
skill and ability a fair picture of the company’s position, the question is not whether
the circular might not have been differently framed, but whether there is any
reasonable ground for supposing that such imperfections as may be found in the
circular have had, with or without other circumstances, the result that the majority
(who have approved the proposal placed before them) have done so under some
serious misapprehension of the position.” (Emphasis added.)
In relation to the directors’ honesty, Mr Rose confirmed that the Explanatory Statement
contained the directors’ good faith assessment based on the information available at the
time. I have no reason to doubt this.
[132]       The issue here is whether the Explanatory Statement had sufficient information for
the Scheme Creditors to make a reasonable judgment on whether the proposed Schemes are
in their commercial interests. Having regard to ARCM’s criticism, the question might be
posed (paraphrasing Clauson J) thus: have the majority of the Scheme Creditors (who have
approved the Schemes in their respective Scheme Meetings) done so under some serious
misapprehension of the risks and rewards of the Schemes?
[133]       The criticisms ARCM make amount to no more than that different experts may come
to different views about matters which are essentially questions of commercial judgement.
It is not said that the Explanatory Statement omits some critical data. The disputed issues
essentially concern predictions, forecasts and assumptions. They do not relate to known fact
circumstance that can be said objectively to be “correct” or which are susceptible to proof of
that fact. There would therefore be little utility in a proof, as ARCM seeks, as its result
would be the Court’s views on which set of predictions, assumptions or forecasts is more
likely. That exercise would be of doubtful utility to the Scheme Creditors, for whose benefit
the Explanatory Statement is provided.
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[134]       I have considered the ARCM Reports and the Explanatory Statement. On analysis
ARCM’s criticisms of the Explanatory Statement simply reflect differences of commercial
judgement. Given the size and complexity of the Proposed Transaction and the sector and
market in which it operates, the Group is not surprising that different experts, making
difference judgements about assumptions and forecasts come to different views. The
differences are no more than differences of commercial judgement. There is nothing in the
ARCM Reports that would suggest that the Explanatory Statement was not soundly based
or that the conclusions and views expressed in it are outwith the range of views which
directors of the Group could reasonably form. In this context, it does not suffice to show (as
the ARCM Reports do) that others might have come to different judgements on such
matters. Accordingly, I am not persuaded that the Explanatory Statement suffered from any
deficiency such that it precluded the Scheme Creditors from forming a reasonable judgment
on the Schemes. It is in my view not insignificant, though not determinative, that no other
creditors have made any criticism of the Explanatory Statement. The Scheme Creditors have
exercised their own commercial judgment on the Schemes proffered by the Group’s
directors in good faith. There is no deficiency in the Explanatory Statement as ARCM
suggest which vitiates that judgment. This ground of challenge fails
[135]       I turn to consider ARCM’s other jurisdictional challenges falling within stage 1 of the
Buckley test.
ARCM’s challenge falling within stage 1 of Buckley: (2) class composition and the
comparator
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[136]       ARCM’s fundamental challenge was to the petitioners’ use of a solvent comparator.
While the comparator is critical to class composition, ARCM other challenges were said to
fracture class and undermine the petitioners’ use of just two classes. In the main, the focus
of these other challenges was to contend that the petitioners had erred in placing all other
creditors (apart from the Super Senior Creditors) into a single class. In particular, the first of
these was the increase and broad harmonisation of interest rates but, it was said, which
produced too wide a variance of the degree of uplift, and was such as to fracture class. In
respect of the comparator, there were several strands to this challenge: what was the
Group’s position as to its financial prospects (it being said that different statements were too
inconsistent)?; what was the meaning of insolvency in this context? And, as an ancillary
issue to that, did ARCM apply too narrow a reading of statutory cash flow insolvency.
Finally, there was a further, free-standing challenge, that the Retail Bondholders should
have formed their own class.
The objective underpinning the correct composition of creditor classes
[137]       The purpose of class meetings is to place the proposed scheme before a company’s
creditors so they may express their collective view on its merits. This is necessary because it
is inherent in the Part 26 jurisdiction that their legal rights may be affected and altered by
the scheme. It is important to note, however, that it is the collective views of the creditors
which is sought; hence the need to identify the appropriate classes of creditors and for each
of the appropriately constituted classes to meet together. While the risk of oppression by the
majority is one of the obvious risks the court must guard against when considering schemes
under Part 26, it has also been recognised that by ordering a multiplicity of separate
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meetings the court might give a veto to a minority. For that reason, the courts have sought
to ensure that the test for class composition “should not be applied in such a way that it
becomes an instrument of oppression by a minority” (per Chadwick LJ in Hawk at para 33).
Chadwick LJ’s observations were echoed by Lord Millet in UDL where he stated (at pp 183-
184) that:
“the risk of empowering the majority to oppress the minority ... is not the only
danger. It must be balanced against the opposite risk of enabling a small minority to
thwart the wishes of the majority. Fragmenting creditors into different classes gives
each class the power to veto the scheme and would deprive a beneficent procedure
of much of its value”.
To like effect are the comments of Neuberger J (as he then was) in Re Anglo American
Insurance Co Ltd [2001] 1 BCLC 755 at 764, that the Court must guard against being “too
picky about different classes” and ending up “with virtually as many classes as there are
members of a particular group”. (See also Warren J in Hibu (at para 50, citing Hawk),
Hildyard J in Re Noble Group Ltd [2019] 2 BCLC 548 (at paras 86 to 88) and in Re Lehman
Brothers International (Europe) [2019] BCC 115 (at para 70).)
The comparator
Is insolvency a prerequisite of the Court’s jurisdiction under Part 26?
[138]       At the Sanctions Hearing the first respondent did not contend that impending
insolvency was a prerequisite of the Court’s jurisdiction under Part 26, notwithstanding
shades of such an argument in earlier iterations of their position. (It was a significant plank
of the first respondent’s submission at the hearing on its interim interdict action that
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companies which were not at risk of imminent insolvency cannot undertake schemes of
arrangement which trespass on contractual rights.) In any event, as the observations of the
Inner House in Scottish Lion 2010 make clear, imminent insolvency is not a prerequisite to
the promotion of a scheme under Part 26. As the Inner House in Scottish Lion 2010 makes
clear, an arrangement is appropriately directed at a “problem”; that problem need not be
imminent or even impending insolvency.
The ”debt wall”
[139]       In respect of the Group, the “problem” is the debt wall; the totality of the Scheme
Debt Facilities fall due on the same date (ie the Scheme Maturity Date) in about 14 months’
time. This, at least, did not appear to be controversial between the parties. For its part, the
first respondent acknowledges that “[a] solution would need to be found ahead of the debt
maturity date...A solvent refinancing solution is the most likely outcome” (see
Answer 53.10.1). The drawn commitments of the Scheme Debt Liabilities stand at
US $2.6 billion. The petitioners do not exaggerate when they described (at para 75(a) in their
Note on Class) any refinancing of that as a “massive undertaking”. Furthermore, the first
respondent’s expert, Mr Boyle, accepts that the Group will be unable to repay the Scheme
Debt Facilities on maturity. He also accepts that (1) a full refinancing would not be possible
before then, and (2) that it would therefore be necessary for there to be an alternative
transaction, most likely involving the amendment and extension of the Scheme Debt
Facilities. This is reflected in the first respondents’ Answers, where it avers, at
Answer 51.1.2:
“There is a period of at least 14 months, prior to the debt maturity date, in which options
can be explored. There are credible alternatives to the Scheme. Solvent options include: a
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voluntary or involuntary amend and extend of the debt (‘A&E’). An A&E is likely
to be at the core of any solution. The A&E could potentially include a partial
refinancing, sale of assets, an equity raise, or a debt for equity swap.” (emphasis
added)
It is therefore undisputed that an extension of the Scheme Maturity Date is required or, as
the Supporting Creditors’ Senior Counsel, Mr Boreland put it, it appears to be common
ground that (absent the Schemes), the Scheme Companies will more likely than not, be
unable to refinance the Scheme Debt Facilities by the existing maturity in May 2021. It is
also common ground that, absent the Schemes or some form of A&E, the Group will not be
able to repay the Scheme Debt Facilities in full when they fall due on the Scheme Maturity
date in about 14 months’ time.
[140]       The fact that the first respondent and ARCM disagree with what the Group
proposed as the means to address the debt wall reflects a difference of commercial
judgement. However, disputes as to the merits of one set of commercial arrangements over
another, or whether there are better alternatives, are not properly within the scope of a
sanctions hearing or the Court’s Part 26 jurisdiction.
The counterfactual: ascertainment of the likely factual position in the absence of the Schemes
[141]       The starting point is that the ascertainment of the correct composition of the creditor
classes involves a determination of what the likely factual position would be in the absence
of the scheme proposed (ie the comparator), and to assess the creditors’ rights against that
circumstance.
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The petitioners’ use of an insolvent comparator
[142]       One of the critical differences between the first respondent and the other parties was
whether the petitioners had been correct to use an insolvent counterfactual as the
comparator if the Schemes do not proceed.
[143]       The petitioners’ position is that the Group will be unable (or, at least, will very likely
be unable) to repay the Scheme Debt Facilities in full, or fully to refinance the Scheme Debt
Facilities, by the Scheme Maturity Date, and that that supports the use of insolvency as the
relevant comparator. On this basis, the Group determined that two creditor classes sufficed
(the secured creditors and the unsecured creditors). ARCM dispute this.
[144]       The arguments ancillary to the issue of the comparator took many forms: What was
the correct understanding of what the Group had said on this issue? Had the Group’s
public pronouncements changed? Did this require a proof to test the credibility and
reliability of the author of these statements, Mr Rose? What is the import of the ARCM
Materials? What weight, if any, should the Court give to the views of the directors on the
Group’s prospects in a no-Schemes scenario?
[145]       The Explanatory Statement sets out the directors’ views which are that there is “a
very substantial risk” that the Scheme Debt Facilities will not be capable of being refinanced
through new debt facilities, either by the end of June 2020 or by the Scheme Maturity Date in
May 2021 and, in the absence of such refinancing, the Group “would be unable to repay
their liabilities under the Scheme Debt Facilities at maturity” (emphasis added) (see Part A,
para 4.4). If ARCM misconstrued this to mean that it is more likely than not that the Group
would be able to refinance the Scheme Debt Facilities (absent the Schemes) (which was their
positon in their Supplementary Note on Class), by the time of the Sanctions Hearing they
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can have been in no doubt that this was a misreading of the Explanatory Statement. In their
Note on Class (at para 72), the petitioners reiterated the directors’ view “that a failure to
refinance is more likely than not absent the Schemes” (emphasis added). Accordingly, this
was the directors’ view which informed the petitioners’ approach to the composition of the
creditor classes.
[146]       In relation to the first respondent’s charge that there is an inconsistency between that
statement and others by Mr Rose (including the March Release), in my view, there is nothing
in this criticism. (These are set out above.) The Explanatory Statement is the core document
setting out the considered views of the directors for the purposes of invoking the Court’s
Part 26 jurisdiction. The statements in the Rose affidavits, fairly read, are not inconsistent
with this; they are commentary on the Group’s position and its response to the positions
advanced by ARCM and the first respondent from time to time. The March Release
prompted a further round of affidavits (Prest 2 and Rose 3). It is important to understand
the purpose of the March Release. It is the public statement commenting on the Group’s
annual accounts on their release. The accounts, and therefore the comments thereon, are
retrospective; by contrast, the consideration of a comparator is necessarily prospective, as it is a
consideration of the counterfactual in the future if the Schemes are not approved. I reject the
first respondent’s contention that a proof is necessary to test the credibility and reliability of
Mr Rose on these matters. The more fundamental point, however, is that a dispute about
what precisely Mr Rose said on several occasions in different contexts is apt to obscure (and,
indeed, are irrelevant to) the core issue, which is: what is the likely position in the absence of
the Schemes.
[147]       What, then, is the likely factual position absent the Schemes? While there was a
degree of common ground as regards the Group’s likely inability to repay or refinance the
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Scheme Debt Facilities by the Scheme Maturity Date, there was a sharp divide as to whether
that instructed an insolvent comparator. There is no doubt that, by reason of the magnitude
of the debt wall and the approach of the Scheme Maturity Date, the Group will not be able to
continue in business as a going concern for the foreseeable future. Rather, within a time
horizon of 14 or months, it is patently the case that (absent an A&E) the Group will be
unable to repay the Scheme Debt Facilities in full. The petitioners characterise this as being
“more likely than not” that the Group will enter some form of insolvency proceedings in or
prior to May 2021. Leaving aside the sparring as to precise formulation of the probability of
insolvency (and whether Mr Rose’s several utterances were entirely consistent with one
another), the first respondent cannot really dispute this fact.
[148]       To put it another way, there is nothing in the materials produced by ARCM that
provides a cogent basis to challenge, much less to displace, the directors’ view of the
likelihood of some form of insolvency in a no-Schemes scenario.
The meaning of insolvency
[149]       I have set out the parties’ respective positions in detail, above (see paras [69] to [75]).
The first respondent contends that, in this context, the statutory definitions of insolvency in
section 123 IA 1986 (ie a cash flow or balance sheet basis), apply, and necessarily so, to the
exclusion of a broader understanding of insolvency. In essence, ARCM’s position is that in
the absence of imminent insolvency (because the statutory tests for insolvency in section 123
of IA 1986 are not met), a solvent comparator must be used (see, eg ARCM’s First Note on
Class, at paras 29-31). The petitioners contend for consideration of a broader range of
circumstances in the determination of whether an insolvent comparator is appropriate.
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[150]       I do not accept the first respondent’s submissions on this point. The formalism
inherent in the first respondent’s position finds no support in the statute or the caselaw.
More fundamentally, and in my view fatally for their position, is the first respondent’s
failure to engage with the problem that the debt wall poses. It is artificial to a very high
degree to acknowledge, on the one hand, that the problem of the debt wall looms on the
horizon, but to maintain, on the other, that that immutable fact is nonetheless left wholly out
of account because that circumstance does not fall within the technical definitions of
insolvency in section 123 of IA 1986.
[151]       On this point, I prefer the submissions of the petitioners and the Supporting
Creditors. The fact that the Group may not satisfy the definitions of cashflow or balance
sheet insolvency for the purposes of section 123 of IA 1986 does not preclude the Group’s
use of insolvency as the comparator in identifying the correct class composition. By
contrast, I find the petitioners’ rationale for an insolvent comparator more persuasive: there
is a likelihood or risk of an inability on the part of the Group to repay the Scheme Debt
Facilities in full when they fall due, even if the Group does not as yet satisfy the test for
cashflow insolvency (ie an inability to repay its debts as they fall due), because the Scheme
Debt Facilities are a few months short of being classified as “current” liabilities.
[152]       The petitioners also presented a fall-back argument (based on Eurosail) in response to
ARCM’s contention that in order to justify an insolvent comparator it is necessary for one or
other of the statutory definitions of insolvency in section 123 of AI 1986 to be met. In short,
this was that on the basis of Eurosail (see Lord Walker at para 37), the cashflow test was not
confined to presently-due debt, but it applied to “debts falling due from time to time in the
reasonably near future”. Lord Walker continued: “What is the reasonably near future …
will depend on all of the circumstances…”. In this case, there is the debt wall: the very
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88
magnitude of the amount due, coupled with the fact that it all falls due on the same date,
cannot be ignored (as the first respondent’s approach does). In the “reasonably near future”,
as Lord Walker phrases it, the totality of the Scheme Debt Facilities will fall due. Even the
first respondent’s experts, especially Mr Boyle, acknowledge that the Group will be unable
to pay this unless something is done (Mr Boyle figures an A&E coupled with other steps).
The insolvent comparator is correct.
[153]       For these reasons, I reject ARCM’s challenges to the petitioners’ use of an insolvent
comparator.
Economic differential affecting class: Do interest rates or the Upfront Fee fracture class?
[154]       I turn to consider the other matters that were said to fracture the class.
[155]       ARCM identified an economic differential which they argued affected class
composition. The overarching submission was that these created special interests and
thereby fractured the creditor classes.
What is proposed under the Schemes
[156]       There are 15 different interest rates payable in respect of the various debt
instruments held by the Scheme Creditors (see para 19 of the petitioners’ Note on Class).
They range from 4.6% + LIBOR (for Facility A of the Term Loan Facility) to 9.63% (for
Series C 2011 of the USPP Notes).
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89
[157]       If sanctioned, the Schemes will result in a uniform coupon or interest rate of 8.85%
on all cash facilities held by the Senior Creditors (including LIBOR to the extent that it is
payable under the relevant facility). Harmonisation will result in an increase for most
Scheme Creditors, albeit the amount of the difference will depend on the level of the existing
interest rate from which it is increased, and a decrease for some of the USPP Notes creditors.
The weighted average increase was calculated at 1.62%. A further feature of the Schemes is
the payment of a fee (“the Upfront Fee”) to those creditors who will either receive less than
the weighted average increase or who will receive a lower interest rate than they currently
receive.
[158]       There are two exceptions to this harmonisation of the rate, which the petitioners
explained as follows:
1) Letter of credit facilities: the letter of credit facilities (which all at present have
an interest rate of 5%) will be increased to 6.94% (rather than to 8.85%). The
rationale for this is that 6.94% is also the new margin that will be paid in
respect of cash facilities within the Senior RFCs. However, LIBOR is also
payable under the equivalent cash facilities. In that case, the all-in rate (of
LIBOR plus the new margin of 6.94%) is 8.85%. This reflects the fact that
LIBOR is a cost incurred in the provision of a cash facility but which doesn’t
arise under a letter of credit (and in which the lender assumes a contingent
liability, rather than provides a cash advance). If there is a call by the
beneficiary under a letter of credit (meaning that an actual cash advance will
be required), then the interest rate payable to that lender will increase to the
same level as a cash facility.
2) The Upfront Fee: An Upfront Free will be payable to those cash creditors who
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90
will receive less than the weighted average increase of 1.62%, or who will
receive a lower rate of interest than they currently receive. The two elements
of the Upfront Fee are (i) an amount to compensate the recipient for the
interest it would have received up to the existing Scheme Maturity Date if the
margin had been increased by the 1.62% average weighted uplift, and (ii) for
those creditors whose interest rate was reduced below their current rate, an
amount to compensate for lost interest until the revised maturity date of
20 November 2023. This equates to the interest the creditor would have
received up to that date if the interest rate had not been reduced.
[159]       The petitioners’ submission is that none of this fractures class or makes it impossible
for lenders under the letter of credit facilities to consult together with the lenders under the
cash facilities. In overall effect, the Senior Creditors will receive the same deal. They also
note that lenders under both types of facilities voted overwhelmingly in favour of the
Schemes. ARCM’s submission, even if correct on this point, would not have led to any
different outcome of the Meetings.
ARCM’s criticisms
[160]       ARCM identifies two ways in which the change of interest rates is said to fracture the
Scheme Creditors. First, ARCM focus on the differential increase for those creditors
receiving a higher rate. So, for example, the US 50$m Converted Loan creditors (at present
in receipt of 8.76%) will see a proportionate rise of c 1% (ie the difference between 8.76% and
8.85%). By contrast, ARCM calculate that the £100m Term Loan creditors (at present in
receipt of 5.47%) will see a proportionate rise of 62% (the figures are taken from para 80 of
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the first respondent’s Submissions). ARCM describe these differentials as “extreme and are
such to preclude any true community of interest amongst these creditors. Secondly, the
same is said of those creditors taking a modest cut in their coupon (being some of the USPP
Notes creditors), who are said to have no community of interest with the creditors receiving
increases. To the extent that the Upfront Fee seeks to address this, ARCM argue that it fails
to do so as it simply cements the differences and that those not in receipt of an Upfront Fee
cannot consult with those who are. There is a subsidiary criticism of Appendix 9 (“Fee
Comparison Table”) of the Explanatory Statement which is said to be misleading in a variety
of ways and which is said to mask the degree of variance in the uplift of interest rates (as set
out in detail at paras 86 to 87 in the first respondent’s Submissions). This is responded to in
Rose 1 (see paras 181 to 182), where an internal rate of return (“IRR”) is said to produce a
much lesser variance than ARCM’s figures, and which brought out a range of uplift of
between 7 and 11.1%.
The petitioners’ and Supporting Creditors’ response
[161]       The petitioners and Supporting Creditors reject those criticisms. The first point
made is that, given the (insolvent) comparator, there is no basis to suggest that a right to
receive a slightly different rate over a short period of time renders it impossible for the
Senior Creditors to consult together with a view to their common interest when voting on
the Schemes. This is because the difference is insignificant when compared with the key
rights the Senior Creditors enjoy and considered in the context of the comparator, namely,
the amount of principal debt at risk, the pari passu ranking in an insolvency and the common
security package. It was also noted that the intention is to harmonise the new coupon rate at
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8.85% for all Senior Creditors. That indicates a clear community of interest between the
relevant Scheme Creditors. Further, rather than further fracturing class, as ARCM suggest,
it is submitted that the effect of the Upfront Fee to any cash Scheme Creditors who will
receive less than the weighted average of 1.62% is to ensure that no Scheme Creditor will
receive a lower return because of the harmonisation of the coupon rate. Accordingly, all
Scheme Creditors will receive a higher return than they would in the absence of the
Schemes. Reference was also made to re McCarthy & Stone plc [2009] EWHC 712 (Ch) at
para 7 and Re Primacom Holdings GmbH [2013] BCC 201 at paragraphs 52 to 53, as examples
where the court rejected similar arguments that different interest rates fractured class.
Indeed, the petitioners observe that in no case has it been held that a difference in interest
rates fractured a creditor class.
Consideration of the economic differential
[162]       On these issues, I prefer the submissions of the petitioners’ and Supporting Creditors
and I have no hesitation in rejecting the ARCM’s submissions.
[163]       In respect of the differential effect of the Schemes on interest rates, ARCM’s analysis
is partial. ARCM’s analysis focuses only on the interest rate change, whereas the analysis in
the Explanatory Statement looks at the total return the creditors stand to receive (ie
including the Upfront Fee and the interest rate harmonisation). On that analysis, contained
in Appendix 9 to the Explanatory Statement (at p 583), all creditors will receive an increased
return of at least 10%; the average increase is 13% and the highest increase is 19%. I need not
record or resolve the minutiae of the parties’ disputes on the precise figures or how they
were calculated (eg regarding the baseline which formed the calculation of the increase in
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the creditor’s return (see ARCM’s Note on Class at para 52ff and the petitioners’ Note on
Class at para 168)). Differences are permissible in the level of benefits a scheme may confer.
The assessment the Court is making is whether those differences (together with other legal
rights) unite or divide the creditors as a class. In considering the common interest of the
Senior Creditors, the fact that they all will benefit is, in my view, a unifying factor and is
likely to outweigh the differential in that uplift. In relation to the Upfront Fee, I accept the
petitioners’ submissions that this is a comparatively minor feature of the Schemes. The
significant point in respect of interest rates (coupled with the equalising effect of the Upfront
fees (where payable)) is that the Schemes will harmonise these. If the Schemes are
sanctioned, the Senior Scheme Creditors will all benefit. No Scheme Creditor will receive a
lower return; all will receive a higher return than they would have received in the absence of
the Schemes, albeit to varying degrees. Their interests are converging, especially given the
existing commonality of the significant economic rights these creditors already share (as
noted above). The different interest rates and the differential in the degree to which the
Scheme Creditors will benefit does not, in my view, render it impossible for them to have
consulted together in the Scheme Meetings.
Should the Retail Bondholders have constituted a separate class?
[164]       The petitioners grouped the Retail Bondholders in the same class with the Senior
Creditors, on the rationale that they were all unsecured creditors. ARCM contend that the
Retail Bondholders should have constituted a separate class. There is considerable force in
the petitioners’ observations that this is another example of a ground of criticism that is
advanced by ARCM or the first respondent and in which they have no relevant interest.
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This is because the ARCM vote against the Schemes falling into this debt instrument is
stated in the petitioners Note on Class (at para 27) as 1%; whereas 97% of the Retail
Bondholders voted in favour. In other words, the argument has no practical relevance and
would not have affected the outcome of a meeting comprised (on this hypothesis) of just the
Retail Bondholders. Putting it another way, even in the absence of the Retail Bondholders
(who, on the hypothesis were voting in their own separate class), the Senior Creditor Class
would also have approved the Schemes by a very large majority without the Retail
Bondholders.
[165]       Analysed in light of the petitioners’ comparator (which I have accepted), there are no
material differences between the legal rights of the Retail Bondholders and the Private
Creditors. Any differences arising between the Senior Creditors and the Retail Bondholders,
eg arising from the fact that the latter are not party to the Override Agreement, are largely
irrelevant. In the no Schemes scenario, all amounts owing to the Private Creditors and the
Retail Bondholders would become immediately due and payable, and creditors would have
a right to lodge a proof of debt for the entire amount owing to them. The fact that the Retail
Bondholders are not parties to the 2017 Override Agreement does not make it impossible for
them to consult together with the other Senior Creditors with a view to their common
interest. I accept the petitioners’ submission that this is also reflected by the fact that both
groups of creditors voted overwhelmingly for the Schemes.
Application of the test for class composition
[166]       As I recorded above (from para [58]ff), the proper approach to the question of class
composition was a matter of dispute between the parties. While on the case law this
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involves a consideration of two sets of rights (the creditors’ existing rights against the
company which are to be released or varied and any new rights which the scheme gives to
those creditors (see para [62])), the petitioners focused on the first stage (to the effect that if
there were no material differences the creditors will form a single class) whereas the first
respondent focused on the second stage (which presupposed that there were material
differences and the relevance of which the court needed to assess). The first respondent
emphasised the observation of the test to be applied at this stage, namely, that a class “must
be confined to 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” (per Hildyard J in Apcoa,
paraphrasing Sovereign Life at p 583 and Hawk). In considering class composition, I begin
with a consideration of the two sets of rights just noted.
The Creditors’ existing rights considered
[167]       The assessment of class begins with a consideration of the Scheme Creditors’ existing
rights against the Group, which are to be waived or released under the Schemes. In relation
to their existing rights, the principal difference between the Super Senior Creditors and the
other creditors is that the former will rank ahead of the latter. It is that feature that justifies
treating the Super Senior Creditors as a distinct class, and for which the caselaw provides
support. (I did not understand ARCM or the first respondent to demur from the proposition
that the Super Senior Creditors properly form a separate class.) What of the other rights of
those whom the petitioners placed in the second class, the Senior Creditors? The interest
rate or coupon payable to the Group’s creditors also varies according to debt instrument.
The interest rates are detailed in the table at paragraph 19 of the petitioners’ Note on Class
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and comprise a mix of fixed rates (of between 5% and 9.63%) and variable (ie varying
between 4.6% and 6.85% above LIBOR). I have already considered whether the different
interest rates would fracture class. Of course, the amounts the Senior Creditors are owed
and the currency in which that indebtedness is expressed are obviously different. Otherwise,
the rights of the Senior Creditors under the 2017 Refinancing are essentially the same:
1) The Senior Creditors share the same security package;
2) They rank pari passu and without any preference amongst themselves;
3) They have the same maturity date (ie the Scheme Maturity Date); and
4) They share a common set of undertakings, covenants, voting rights and
events of default under the 2017 Override Agreement (other than the Retail
Bonds).
It is patent, in my view, that the key economic rights of the Senior Creditors are similar in
their essentials. In its Submissions, the first respondent referred to an observation of
Hildyard J in Re Lehman Brothers International (Europe) (In Administration) [2018] EWHC 1980
(Ch) at paragraph 106 (citing Re English, Scottish and Australian Charterer Bank [1893] 3 Ch 385
at p 415 and APCOA at para 117), that an insolvent comparator should not be used “as a
solvent for all class differences”. However, one of the striking features in these applications
is the significant commonality of the essential economic and legal rights of the Group’s
creditors. This convergence is in large measure a consequence of the fact that Private
Creditors (ie all but the Retail Bondholders) became party to and are bound by the 2017
Override Agreement. In addition, there is the harmonised Scheme Maturity Date. If the
caveat is that insolvency should not be used to dissolve differences, in this case there are few
significant differences or rights amongst the Senior Creditors on which that solvent could
work. Testing this against the counterfactual (ie in the absence of the Schemes), they will all
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be affected by the inability of the Group to refinance the Scheme Debt Facilities in full by the
Scheme Maturity date. Because of the shared maturity date and the pro rata ranking, any
deficiency will bear upon them in the same way. The Senior Creditors (being the unsecured
Private Creditors and the Retail Bondholders) will be, as the petitioners put it, “in the same
boat”.
Consideration of the rights of the Scheme Creditors under the Schemes
[168]       The Schemes preserve the prior ranking of the Super Senior Creditors. In their Note
on Class the petitioners state that the Super Senior Creditors will “almost certainly be repaid
in full” but that the same is not necessarily true for the Senior Creditors.
[169]       In relation to the Senior Creditors, they are treated in materially the same way under
the Schemes. The Schemes will uniformly extend the maturity date of the Scheme Debt
Liabilities to the same date of 30 November 2023. This same extension will also apply to the
Super Senior Creditors. Furthermore, they will be waiving the same event(s) of default
which may arise from the Acquisitions. To the extent that the Acquisitions contribute to an
improved liquidity from RBL facilities, the Senior Creditors will all share in like fashion
from these benefits. They also share exposure to the risks of the Acquisitions in the same
way. In respect of these matters, the extension of the Scheme Maturity Date and the impacts
of the Acquisitions, the Scheme Creditors (including the Super Senior Creditors) are all
treated equally.
Can the Senior Creditors consult together as a class?
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[170]       I return to the question: Can the Senior Creditors consult together as a class? While
the parties differ as to whether the initial focus is on similarity rather than dissimilarity, I am
not persuaded that that difference in approach would alter the outcome in these petitions.
Even if there are “material differences” (and the second stage is reached only if there are
“material differences”), the issue is whether those material differences make it “impossible
for them to consult together with a view to their common interest”. ARCM identify a
number factors which they say fracture class or, in this context, constitute “material
differences”. I have addressed each of those above. Even considering these factors
cumulatively, having regard to the Scheme Creditors’ rights, I am not persuaded that the
factors ARCM invoke make it “impossible” for the Senior Creditors or the Super Senior
Creditors to consult together in their respective classes with a view to their common interest.
The differences of the quantum of indebtedness owed to different creditors (or the currencies
in which that is expressed) are permissible differences. In respect of the different interest
rates payable (and which was not regarded as fracturing class for the purposes of the 2017
Schemes), the Schemes will harmonise interest rates to a very significant degree.
Accordingly, apart from the distinction between those creditors who are secured (ie the
Super Senior Creditors) and the remaining Scheme Creditors (ie the Private Creditors and
the Retail Bondholders), there is a commonality of rights to a very significant degree.
Subject to consideration of ARCM’s submission about interests derived from rights, I find
that ARCM’s challenge on the basis that the petitioners had not convened correctly
composed classes of creditors fails.
[171]       In support of their position, the petitioners refer to Re Hibu Group Ltd [2016] EWHC
1921 (Ch). In that case, two linked schemes of arrangement were proposed, one of which
was a members’ scheme relating to a company called Topco. Under Topco’s articles of
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association, members holding 5% of Topco’s shares could requisition a meeting to remove a
director. Under the scheme, the articles of association were amended to delete this
provision. Some members held more than 5% of the shares and, in effect, lost their ability to
requisition a meeting. Warren J held that the members could nevertheless vote in a single
class. He stated at [56]:
“So far as concerns the Topco Scheme, the rights of all shareholders (both before and
after the scheme) will all be identical. It is true that the interests of different groups
of shareholders may differ. For instance, those with more than a 5 per cent
shareholding can require, under the Existing Articles but not the Revised Articles, a
meeting to remove a director to be requisitioned. Nonetheless, all the shares are
identical in that they carry the same rights. To conclude that this potential
divergence of interests should lead to separate classes would lead to precisely the
sort of proliferation of classes which the courts have cautioned against. The time for
considering any alleged unfairness is at the sanction hearing. In my judgment, a
single class is appropriate for both of the two schemes.”
Rights, interests and interests derived form rights
[172]       In consideration of class composition, it is clear on the authorities that the Court is
concerned with the legal rights of the creditors as against the scheme company, not their
economic interests (see, eg, UDL at para 27). It is in this context that ARCM’s blocking vote
or veto falls to be considered. ARCM are particularly aggrieved by the loss of their de facto
veto. The petitioners dismiss this as constituting no more than an interest and which falls
outside of the consideration of the legal rights which are considered at this stage. They note
that there is no differentiation in the legal rights associated with creditors’ votes and that in
relation to the collective power of votes, a number of Private Creditors (acting alone or in
concert with other Private Creditors) have a practical ability to block amendments and
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waivers under Clause 23.2. In addition, new or existing Private Creditors could build up
additional blocking positions through the acquisition of debt. This is no more than an
interest. ARCM’s veto arises simply as a function of the quantum of the debt that they hold
within each debt instrument. However, the practical ability to block is not itself a legal right
in any meaningful sense. Rather, it is a consequence of exercising the voting rights attached
to the quantum of debt. At the Sanctions Hearing, the first respondent did not develop or
apply the formulation of “interests derived from rights” it had identified in the caselaw. I
am not persuaded that in the context of this case, that formulation would lead to any
different approach in the assessment of the issues. Any veto is derived from the quantum of
debt held; not from the voting rights. Creditors with different levels of voting power may be
able to achieve different results by exercising their rights as a consequence of the amount of
debt which they hold, but that is irrelevant to class composition: the legal rights attached to
the debt are the same.
[173]       Furthermore, the petitioners observe that a recurrent theme in ARCM’s submissions
is that the voting rights of each Private Creditor Group are somehow unique. (See eg
ARCM’s Note on Class at para 76].) The petitioners submit this is wrong. They emphasise
that in the context of a scheme of arrangement, it is necessary to consider the substance of a
legal right not the identity of the person or group who is able to exercise it. To do
otherwise would result in the unnecessary proliferation of classes. As a matter of substance,
the voting rights conferred on each Private Creditor Group (and on each individual Private
Creditor) are the same. Furthermore, when the comparator to the Schemes is taken into
account, the analysis becomes even more straightforward. In that no-scheme scenario, it is
more likely than not that the Scheme Companies will be unable to refinance their debts in
May 2021 if the Schemes are not implemented. This would be likely to result in the Scheme
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Companies entering into formal insolvency proceedings. In that counterfactual scenario, the
contractual voting rights under the Override Agreement would, the petitioners submit, be
completely irrelevant. For these reasons, they submit that the contractual voting regime
under the 2017 Override Agreement and the modification of that regime under the Schemes
do not fracture the class of Senior Creditors.
Conclusion on first stage of the Buckley test
[174]       The other matters considered at the first stage of the Buckley test are whether the
petitioners have complied with the terms of the convening order and whether the statutory
majorities were obtained. The Reporter confirms that:
1) subject to minor deficiencies which should be waived, there has been
compliance with the Court’s convening order (see Report at paras 2.10 to 2.11
and 5. 3;) and
2) the statutory majorities were obtained (on which see the Report at paras 2.12
to 2.17 and 5.3, and Rose 1 at paras 167 to 168, and the Chairman’s reports of
the Scheme Meetings, which the petitioners have also lodged).
The deficiency the Reporter noted in respect of compliance was minor and caused no
prejudice. I am satisfied that the first stage of the Buckley test has been complied with.
Second stage of the Buckley test
[175]       The questions for the Court at the second stage of the Buckley test are whether the
class was fairly represented at the Scheme Meetings and whether the majorities were
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coercing the minority in order to promote interests adverse to the class whom they
purported to represent.
[176]       It is in this context that ARCM argue that certain payments (described by the
petitioners as fees and disbursements) constitute collateral benefits or special interestsand
which mean the Court cannot sanction the Schemes on the basis of the present votes. In
framing their challenges at this stage of the Buckley test, ARCM refer to the observations of
Hildyard J in Re Lehman Brothers International (Europe) (in admin) [2018] EWHC 1980 (Ch),
where he stated (at para 88):
“The questions at the heart of the matter at this stage are (a) whether the majority creditors
had some “special interest(s)” different from and adverse to the other members of the higher
rate creditor class by which it is shown (b) they were predominantly motivated in voting as
they did; if so, (c) whether their votes are to be (i) disregarded or (ii) discounted, and (d) what
effect that should have in terms of whether or not the court should decline to sanction the
scheme.”
The special interests ARCM identify
[177]       ARCM identify the following as special interests:
1) Fees: ARCM note that fees for “collateral” services of between approximately
US $1 million and approximately US $12 million are to be paid to certain of
the scheme creditors which, they submit, give rise to an obvious inference
that the votes of these creditors are motivated by the fees;
2) The extreme variance in benefit: ARCM revisited the issue of the (on their
calculation) extreme variance in the degree of uplift in interest rate. They
submit that it is an obvious inference that those creditors who receive more
beneficial economic treatment under the Scheme (ranging between 8% and
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67%), would be induced to vote in favour, which they say illustrates that the
class was not fairly represented;
3) The new majority of 66.66%: ARCM also note that, if the Schemes are
sanctioned, then those creditors who make up the 66.66% (whom they
described as “the new majority”) required to make new amendments (whom
ARCM equate with the Supporting Creditors), pursuant to the new
provisions of the Override Agreement or the Implementation Deed have a
“special interest”; it was said that they are voting in favour of the Scheme to
receive ultimate decision-making power;
4) Trading out of their positions: ARCM also submit that the Schemes were
designed to induce creditors to support the Scheme so that they might trade
out of their positions. In support of this, they refer to the passage in the
Explanatory Statement (at para 5.20), were the effect of harmonized interest
rates will be to “facilitate a broader and deeper trading market than currently
exists, which in turn should have a positive impact on the price of the debt in
the secondary market.”
The economic differentials ARCM argue constitute “special interests”
Special interest 1: Variance of uplift of interest rates
[178]       The two economic differentials ARCM identify as relevant to the second stage of the
Buckley test are interest rates and other collateral benefits (fees and disbursements) because
they are said to constitute “special” interests to induce votes in favour of the Schemes. This
is one reason why a “special interest” argument is raised at stage 2 of the Buckley test, even if
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the factor relied on could also have been said to fracture class (as would be considered at
stage 1 of the Buckley test). ARCM did not offer a definition of “special”, but I understand
ARCM to mean an interest particular to one or more of the creditors and with the intended
purpose of inducing those with a special interest to support the scheme. As noted above,
ARCM also advanced the interest rate issue as a factor that fractured class, because of the
very wide variance in the percentage of uplift. I refer to, but do not here repeat, the details
relating to the interest rates, the parties’ differing calculations of variance and the Upfront
Fee.
[179]       In presenting its argument at this stage ARCM again focus solely on the proposed
amendment to the interest rate. While this is to be harmonised, at present the interests rates
vary among the debt instruments with the consequence that the degree of improvement will
vary (ARCM’s “variance” point). In my view, a focus on the proposed amendment to
enhance and harmonise the interest rate on its own does not provide a complete basis for
assessing whether it constitutes a special interest. It is incomplete, because the Upfront Fee
was explicitly linked to interest rate harmonisation to ensure that no Scheme Creditor will
receive a lower return as a result of that harmonisation. There is patently no material
difference such as to constitute a special interest, if the interest rate harmonisation is
considered in combination with the Upfront Fee (as the Schemes intend), because all Scheme
Creditors will receive a higher return (in the form of interest) than they would in the absence
of the Schemes.
[180]       Even if ARCM’s calculation of the variance is accepted (and part of the petitioners’
response was to point to the IRR as a different metric) and considered in isolation from the
Upfront Fee, on analysis it is difficult to see how this creates a special interest either among
the creditors benefiting (to a greater or lesser degree) or among those creditors who will see
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a decline in their coupon. The vast majority of the Scheme Creditors will benefit from a
harmonised and enhanced interest rate. While a creditor at the higher end of ARCM’s
spectrum of variance, say the creditor getting 67% improvement, may vote for the Schemes
more enthusiastically, its interest is not adverse to the creditor who is also benefiting, albeit
to a lesser degree (eg getting only, say, a 5% improvement on its current interest rate). Both
are benefiting from the Schemes. They have a common interest to vote in favour of the
Schemes, not a special one (ie one particular to them or marking them out from the rest of
this class). What ARCM’s variance argument leaves wholly out of account are the creditors
whose interest rate will be reduced as a consequence of harmonisation.
[181]       If the Upfront Fee is left out of account (as it is on ARCM’s approach to this issue),
the Schemes will be detrimental to these creditors in this respect. While this could be said to
give them an interest adverse to the majority who are benefitting, that is the very opposite of
a “special interest” with which we are concerned. It may be for that reason, that ARCM do
not address the position of these creditors in advancing this argument. However, the plain
fact is that the vast majority of creditors in this class voted in favour of the Schemes,
including those whose interest rates will be reduced by harmonisation (if considered
without the effect of the Upfront Fee). In conclusion, in my view, ARCM’s variance
argument founders in the face of the overwhelming support of the Scheme Creditors to
whom the variance argument applied (ie those who will benefit from an enhanced interest
rate). It is difficult to apply the descriptor “special” to a feature (here an interest uplift),
shared by all of the members of the group (ie all of the creditors to whom ARCM’s variance
calculation applied).
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Special interest 2: Other collateral benefits
[182]       If the Schemes are sanctioned, some of the Scheme Creditors will receive payment of
fees representing the provision of certain services. So, for example, fees will be payable to
RBC (the Royal Bank of Canada) in relation to underwriting the rights issue. ARCM argue
that this constitutes a “special interest” different from and therefore adverse to the interests
of the rest of the class of creditors. The Petitioners’ position is that the fees are in respect of
services, such as RBC’s provision of those commercial services and assumption of risk being
undertaken, and that the amount of fee payable is in line with market rates in arms’ length
transactions (see Rose 1). The petitioners argue that RBC’s vote could only be discounted if
the fees payable to RBC created an interest which is “adverse to, or clashes with, the interest
of the class as a whole” (per Hildyard J in Lehman Brothers International (Europe) [2018] Bus
LR 1012 (“Lehman (Europe)”)(at para 89)) and that in any event it would be necessary to show
that RBC would not have voted for the Schemes “but for” the opportunity to receive the
underwriting fee (ibid at paras 90 to 103). Finally, the petitioners point out, that even if
RBC’s votes were discounted, this would not have affected the outcome of the Meetings and
so ARCM’s argument on this point has no practical effect.
[183]       A second category of payments ARCM challenge (and which they characterise as a
“collateral economic benefit”) are the disbursements to be paid to a creditor’s financial
advisers for their work in connection with the Schemes. ARCM rely on Noble in which the
court had to consider a work fee of US $36 million. The petitioners’ position is that the
circumstances of that case are readily distinguishable, as the proposed disbursements are of
a wholly different character and order. The petitioners have disclosed to ARCM the
information relating to the disbursements. The disbursements confer no “net” benefit on the
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creditor concerned: absent the Schemes, the creditor would not have incurred professional
fees; payment of its reasonable professional fees ensures it is not out of pocket. There is no
“benefit” to the creditors concerned.
[184]       In relation to the fees, it is important to note that none of these is a consent fee. As
for the underwriting fees to be paid to RBC or the disbursements to defray the professional
fees of some of the Scheme Creditors, I did not understand ARCM or the first respondent to
challenge the amount of these as out of line with the market, it was just the fact that these
were to be paid. However, I find that the RBC fees are patently in respect of additional
commercial services to be rendered and the risks RBC will assume. Payment to defray the
professional fees some of the Scheme Creditors have incurred in advising on the proposed
Schemes does not actually benefit the creditors concerned. I am also persuaded that there
was no reason or basis to conclude that RBC (or other creditors whose disbursements are
being defrayed) would not have voted for the Schemes “but for” the underwriting fees. It is
not insignificant, in my view, too, that the other Senior Creditors not in receipt of such fees
or disbursements, nonetheless voted in favour of the Schemes.
[185]       In my view, these matters do not constitute a “special interest”. I am fortified in this
view, too, by the Reporter’s conclusion that no collateral benefit arose from the payment of
these fees (see paras 4.71 to 4.73).
Are there undisclosed fees?
[186]       By the time of the Sanctions Hearing, the question of whether there were undisclosed
benefits was implied rather than fully argued. To the extent that this may initially have been
based on a criticism that the Explanatory Statement did not disclose the precise figures to be
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paid, eg to RBC, I am not persuaded this was required. In any event, the Rose 1 affidavit has
provided more information about this. When pressed at the Sanctions Hearing, Senior
Counsel for the first respondent was unable to identify any other basis to support this
submission. I give this criticism no weight.
The “new majority”
[187]       I have already considered ARCM’s submissions in relation to the amendment of the
voting rights, to the extent it was said that these kinds of rights were not susceptible to the
Part 26 jurisdiction or that the amendments amounted to a confiscation. ARCM advanced a
discrete argument relevant to stage two of the Buckley test, that, if amended, the new (lower)
majorities under the voting rights had the effect of conferring control over the Groups’
affairs in favour of the “new majority” (as ARCM termed it) and that this incentivised those
who would constitute that new majority to vote for the Schemes.
[188]       As noted above, there is nothing unique in ARCM’s ability under the present voting
regime to block certain waivers or amendments. Lloyds also have a blocking vote in the
Term Loan Facilities (one of the two debt instruments in which ARCM have a veto). Other
creditors have sufficient debt to exercise a veto in other debt instruments (eg the USPP debt
instruments), and every private creditor has a veto for certain kinds of waivers or
amendments. Furthermore, the new voting regime proposed results in every dollar of debt
(regardless of the debt instrument under which it is held) having the same voting power
attached to it. The weighting of each vote is the same for every creditor in the defined class.
Accordingly, in my view, there is no sound basis to contend that the voting rights of the first
respondent (or of ARCM) are being treated differently. There is no discrimination in legal
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rights or voting power. It may be described as a fair regime. Prima facie the equal treatment
of the legal voting rights militates against a “special interest” argument.
[189]       It must be noted, too, that there is a curiously binary quality to ARCM’s argument, as
they necessarily assume that they will be in the minority for every vote and all of the other
creditors necessarily in the majority. There is also self-fulfilling quality to ARCM’s
argument, too, because they attribute a fixity and cohesion to the “new majority” (as they
term it). However, there is no basis for presupposing that (in effect) all other Scheme
Creditors (whether Private or Retail Bondholders) will necessarily or always vote en bloc (or
do so against ARCM), or that ARCM will never form part of that majority for any vote,
regardless of subject matter. There is no basis for assuming the kind of predetermination of
creditor groupings or voting alignments that ARCM presuppose. There is nothing in the
amended provisions of the Override Agreement that prescribes any “new majority” as a
matter of legal right or that consigns ARCM to be in the minority. I am not persuaded that
the proposed amendments to the voting rights create any special interest as ARCM contend.
Trading out
[190]       This argument was based on a passage from the Explanatory Statement, to the effect
that one result of the Schemes will be to “facilitate a broader and deeper trading market than
currently exists, which in turn should have a positive impact on the price of the debt in the
secondary market.” ARCM’s position is that this will be uniquely disadvantageous to them
as the Group’s largest creditor (this argument is not open the first respondent) and that it
will be more difficult for them to trade out (ie sell their debt in the enhanced trading
market), while smaller creditors could (and ARCM surmised, will) trade out. While ARCM
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is the Group’s largest creditor, their position is not unique as there are other creditors also
holding very substantial amounts of debt to whom this might also apply. In any event, this
submission is based on speculation as to what other creditors may or may not do. Returning
to the passage from the Explanatory Statement quoted: if it is the case that there will be a
“positive impact” on the price of debt in the secondary market, this will be available to all of
the creditors. Whether or to what extent a creditor takes advantage of that does not
constitute a “special” interest (it cannot be “special” if the effect is universal). In any event, it
is not a feature of the Schemes themselves, in the sense of a right that is conferred or created
and from which only some of the creditors will benefit.
ARCM’s complaints anent Mr Rose’s comments at the start of each of the Scheme Meetings
[191]       It may be here convenient to address one of ARCM’s other complaints. ARCM take
issue with Mr Rose’s comments at the outset of each of the Scheme Meetings (that the Group
reserved its position in relation to ARCM’s hedge) and suggest that this was an attempt to
sway the vote (see Answer 76.1). On this point, I accept the Supporting Creditors’
submission that ARCM have produced no evidence indicating any possibility that any
Scheme Creditor was swayed. ARCM did not attend, but they had a representative
(Mr Lawford) who was present and spoke before the votes were cast. At the Scheme
Meetings Mr Lawford made the point, on behalf of ARCM, that they had no collateral
reason for voting against the Schemes. In these circumstances, there is no basis for a charge
of procedural or substantive unfairness arising from Mr Rose’s comments. Further, there is
nothing to suggest that the Scheme Creditors were acting in bad faith.
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Other factors relevant to consideration of stage 2 of Buckley
[192]       The petitioners identified additional factors that were said to displace the contention
that there was a special interest of one sort or another operating. These include the
following:
1) Turnout: turnout is a relevant consideration at stage two of Buckley (Re The
British Aviation Insurance Co Ltd [2006] BCC 14 at para 116). More than 600
Scheme Creditors, representing 96.82% of the Senior Creditors and 99.81% of
the Super Senior Creditors (in value) were represented (in person or by
proxy) at the Scheme Meetings. The Supporting Creditors’ description of this
as “exceptionally high” is apt;
2) The range of creditors who voted: The Schemes were supported by some of the
largest banks in the world (eg Deutsche Bank), by other leading institutions
and by entities with considerable financial experience in this section. At the
other end of the spectrum from the Private Creditors are the Retail
Bondholders, 97% of whom voted in favour of the Schemes. The vast majority
of these have not entered into any contractual agreement or Support Letter
agreeing to vote in favour of the Schemes;
3) No consent fees: This was noted above, but no consent fees or other
inducement was paid in consideration of signing a Support Letter or agreeing
to vote in favour of the Schemes; and
4) Support across every debt instrument: There was a broad range of support for
the Schemes across every debt instrument within the Senior and Super Senior
Liabilities. Apart from ARCM, very few other Private Creditors voted against.
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These were two lenders in the Converted facility and a handful of Retail
Bondholders who held, respectively, less than .5% and less than .05% (by
value) of the total Senior Creditor Liabilities).
The first respondent did not challenge these factors; nor did it suggest that these were
irrelevant to the Court’s consideration. In my view, these factors do displace any inference
of “special interests” operating, such as the first respondent and ARCM contended.
The Reporter’s view and conclusion on the second stage of Buckley
[193]       Finally, in this context I note the Reporter’s conclusion that those voting in favour of
the Schemes were acting in good faith and that the classes were fairly represented at the
Scheme Meetings: see paras 5.6 to 5.8 of the Report. Of course, that view informs but does
not bind the Court. However, having considered ARCM’s challenges relevant to this stage,
nothing in them has persuaded me that the classes were not fairly represented at the Scheme
Meetings.
[194]       For the foregoing reasons, I find that stage two of the Buckley test has been met.
The third stage of the Buckley test: Are the Schemes fair and which a creditor could
reasonably approve?
The Court’s discretion and the test to be applied
[195]       In terms of section 899(1) of the 2006 Act, the Court has a broad discretion when it
considers whether to sanction a scheme: “the court may ... sanction” (emphasis added).
There is a considerable body of caselaw which provides guidance of how that discretion is
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exercised. The first and second stages of the Buckley test involve consideration of
procedural, formal and jurisdictional matters. It is at stage 3 that the Court’s discretion is
engaged. At the third stage, the Court must consider whether the arrangement proposed in
a scheme is such that an intelligent and honest person, a member of the class concerned and
acting in respect of his or her interest, might reasonably approve it. (See Lindley LJ’s
formulation of the test in Alabama, above). I reiterate that the Court does not substitute its
own assessment for what is fair and reasonable for the view of the relevant scheme creditors.
The Courts have long recognised that the creditors are better judges of what is in the
commercial interests of the class they represent: see English Scottish and Australian Chartered
Bank [1983] 3 Ch 385 at 409 per Lindley LJ; Apcoa at para 128 per Hildyard J and Noble at
paragraph 17(iii) per Snowdon J. For that reason, the Court is not concerned with whether
the scheme proposed is the only fair scheme or the best scheme. In this context, the
Supporting Creditors cite an observation from Hildyard J in Apcoa (at para 128) to the effect
that the authorities “must give full weight to the decision of the creditors” (the Supporting
Creditors emphasis). This may simply be a different way of making the point already made:
the nature of the Court’s jurisdiction under Part 26, involving a consideration of the sanction
of a scheme of arrangement or compromise which the requisite majority of the creditors
have approved, is a form of review (within certain parameters) of whether it is a fair scheme,
as well as to ensure compliance with the procedural requirements of the statute. It has also
been observed that the Court should be slow to differ with the view of the Scheme Meetings
unless something is brought to the Court’s notice to show that there has been some
“material oversight or miscarriage” (per English, Scottish and Australian Chartered Bank at
p 409).
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Caveats from the case law
[196]       It is important, too, to bear in mind the power the Court wields and the care with
which it must be exercised. ARCM stress the “formidable compulsion” (per Bowen LJ in
Sovereign Life, at p 583) which takes place if a scheme is approved, because it is rendered
binding (now by virtue of section 899(3) of the 2006 Act) on all creditors. They also
emphasise the unusual nature of the Court’s power; that it is not an exercise in rubber
stamping, and that the Court should not lightly allow parties “to forcibly change such
obligations with the assistance of the judge”. In support of these submission,s they refer to
observations in Alabama (eg per Bowen LJ at pp 242, 243 (“this is a very remarkable act of
Parliament”; “the object … is not confiscation”). To illustrate these points, they also cite a
number of cases where sanction was refused, including Re British Aviation Insurance Co Ltd
[2005] EWHC 1621 (Ch) (Lewison J), Re Colt Telecom Group plc (No 2) [2002] EWHC 2815
(Ch), [2003] BPIR 324 (Jacob J) and Re Prudential Assurance Company Ltd [2019] EWHC 2245
(Ch) (Snowdon J).
Has the test at stage 3 of Buckley been satisfied?
[197]       The petitioners and Supporting Creditor submit that the Schemes satisfy the third
stage of the Buckley test, namely, that they are Schemes which an intelligent and honest
person, as a member of each of the classes concerned and acting in respect of his or her
interest, might reasonably approve. They also point to the votes overwhelmingly in favour
of the Schemes. For completeness, I note that in his Report, the Reporter has concluded that
the Schemes are fair and reasonable (see especially paras 4.78 to 4.92 and 5.5 of the Report).
[198]       ARCM contest this and make the following points:
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1) It belies commercial good common sense for the petitioners to make
Acquisitions (for an overall purchase price of about US $870m) while at the
same time maintaining they are insolvent;
2) It also belies commercial good common sense that the petitioners value the
Acquisitions at c US $1 billion (see Explanatory Statement, pages 47-48,
paragraph 6 (E)), but obtained for a purchase price of about US $870m,
especially as the vendors are highly expert players in the oil industry; that the
assumptions that purport to justify the purchase price are fundamentally
flawed and the RBL capacity that the petitioners expect, does not exist;
3) There remain concerns about the decommissioning liabilities (eg as outlined
in Mr Ercil’s email to Mr Durrant of 10 November 2019); and
4) (reverting to a matter raised under ARCM’s challenge to the adequacy of the
Explanatory Statement), they contend that, as the Xodus and NERA Reports
make clear, there remain very concerning risks that have not been properly
aired, discussed, and taken on board.
[199]       At bottom, these criticisms amount to no more than a disagreement with the
commercial judgement underpinning the Schemes. The first mischaracterises the directors’
more nuanced views on the Group’s prospects (noted above, under the discussion of the
meaning of insolvency for the purposes of the comparator). The first three points above are
all directed at the Acquisitions; the fourth is indirectly related to the Acquisitions, too,
because many of the asserted deficiencies of the Explanatory Statement relate to the (it is
said) inadequate disclosure or analysis of the risks that the Acquisitions will bring (eg
whether those be underestimations of decommissioning liabilities, overestimations of
reserves or the risks of enlarging the Group’s exposure to the gas market). The petitioners
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note that a consistent theme of ARCM’s opposition is their preference for their alternative
proposal. The details of this alternative and ARCM’s grounds of opposition are set out in
the Explanatory Statement. A leit motif of ARCM’s position throughout is their determined
opposition to the Acquisitions. As they submit above, certain aspects of the Acquisitions are
said to bely “commercial good common sense” or in respect of which “concerns remain”.
Notwithstanding the use of the passive voice, those are ARCM’s concerns. The fundamental
difficulty for ARCM’s submission is that their opposition to, and concerns about, the
Acquisitions, and their preferred alternative, were all placed before the Scheme Creditors.
The Scheme Creditors (apart from ARCM) voted overwhelmingly in favour of the Schemes
and, by the same token, the majority overwhelmingly rejected ARCM’s proposed
alternative.
Comment on the ARCM Reports
[200]       Turning to the ARCM Reports, I did not find these assisted the Court with the
relevant issues it had to determine. As the Reporter has not had the opportunity to
comment on them in his Report, it is appropriate that I comment on them.
[201]       There is considerable overlap in the Fuller and NERA Reports, in that each reviews
the Acquisitions, and their assessed benefits and risks, and each expresses disagreement
with assumptions or the commercial assessments underpinning the Schemes. Mr Rose
responds to these Reports in Rose 2 (at paras 28 and 29). He notes that the author of the
NERA Report has no knowledge or experience in the oil and gas sector, in RBL financing, in
restructuring or schemes of arrangement. Mr Rose explains that the Group’s RBL
assumptions had been developed following extensive discussions with lenders experienced
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in RBL facilities and that these assumptions were confirmed by PWC in the PWC Report,
and by two recognised experts in the sector, Rothschild and DNB (included as appendices 60
and 61 to Rose 1). Mr Rose’s explanations suffice to demonstrate that there was a reasoned
and tested basis for these features of the Schemes. In relation to Mr Prest’s criticism that the
PWC Report lacked independence, because it applied the Group’s working assumptions, I
have already noted Mr Rose’s comment (in Rose 2) is that PWC nonetheless reviewed the
Group’s RBL assumptions, and they confirmed that these were all within a reasonable range
(see PWC Report at p 59). Furthermore, PWC’s views are supported by other expert
analysts, namely Rothschild and DNB. PWC were also clear that it was outwith their
expertise to consider the reserve assumptions for decommissioning liabilities.
[202]       Of the ARCM Reports, the Boyle Report is the one that offers the most
comprehensive consideration of the Schemes as well as suggested alternatives to them. What
is notable is that many aspects of the Boyle Report support the petitioners’ case about the
need to address the impending maturity date of the Scheme Debt Facilities (the circumstance
that was critical to the question of comparator). For example, Mr Boyle agrees:
(1) That the failure of the Schemes and the Scheme Debt Facilities becoming
current in June 2020 will increase market concern about the Group’s financial
position (see para 4.9.10);
(2) That the Group will not have sufficient liquidity to repay the Scheme Debt
Facilities ahead of the Scheme Maturity Date (see paras 5.5.5 and 5.5.10);
(3) That an extension of the Scheme Maturity Date is not feasible prior to the SDF
becoming current in June 2020 (para 7.3.5);
(4) That a full refinancing ahead of the Scheme Maturity Date in May 2021, is not
a “viable alternative” to the Schemes (para 7.4.8 and 7.12.21);
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(5) That, at most the disposal of non-core assets could assist with deleveraging,
but it does it not provide a standalone solution to the Scheme Maturity Date
falling due in June 2021 (para 7.5.13, 7.5.18 and 7.5.19); and
(6) That a number alternatives he considered are not feasible (such as a full
M&A, a debt for equity swap) alternative to the Schemes.
One of the critical features of Mr Boyle’s report is, in fact, its acknowledgement that the
Group did not have the liquidity to repay the Scheme Debt Facilities before the Scheme
Maturity Date. That is the very problem which the Schemes seek to address.
[203]       In respect of his consideration of alternatives to the Schemes, the analysis is
superficial, often generic and, at times, his assertions that these could be achieved in the
necessary timescale borders on glib. The first alternative he considers is that of partial
refinancing, an option which the Group has considered and rejected for the reasons set out
in the Explanatory Statement and Mr Rose’s affidavits.
[204]       On the prospect of an A&E, in response to the Group’s and the creditors’ concern
about the impact of the Scheme Maturity Date on the Group’s solvency, Mr Boyle blandly
states that an A&E would resolve that concern (at para 7.3.2). He enjoins the directors
(without apparent irony) to consider the “commercial and legal options” to manage the risk
of a hold-out by dissentient creditors (at para 7.3.17). He suggests that an A&E would
“appear to be relatively simple to implement”, although he concedes that ”negotiations
amongst a relatively diverse group of stakeholders can be complex” (at para 7.3.19). At best,
an A&E would provide a stable platform “for the Group to explore more short to medium
terms options to delever or finance in the future “. Implicit in this comment is the
recognition of the continuing need to deleverage the Group’s debt position, and that any
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A&E is only an interim measure. In my view, that is utterly destructive to ARCM’s
contention that the true comparator for the purpose of class composition is an A&E (see para
51 of the first respondent’s Submissions). In respect of his consideration of disposal of non-
core assets, most of this section is taken up with recording of prior disposals in the market
by third parties. Mr Boyle acknowledges that disposal of non-core assets on their own “will
not generate sufficient funds to repay the existing debt in full” prior to the Scheme Maturity
Date (para 7.5.13). He couples this with the assertion that this, in conjunction with other
alternatives, such as A&E and partial refinancing “could represent an alternative” to the
Schemes. He does not identify any non-core assets that might be sold and, indeed, does not
have the expertise to know within what timescale such disposals might take place (see
para 7.5.18).
[205]       Turning to his consideration of the equity raise element of the Schemes, Mr Boyle is
not an equity market specialist and he is unable to comment with any confidence on the
prospects of a substantial or even a lesser equity raise; both of those options are heavily
qualified (with the phrase “if achievable” (para 7.7.13 and 7.7.15)). The most he can say in
respect of an equity raise is that it is not a standalone solution (he similarly qualifies the
prospects of a more limited raise (“if achievable”)) and he accepts it would need to be
combined with some other solution.
[206]       Notwithstanding its length and the multitude of appendices, Mr Boyle’s Report
offers nothing new. The options he explores have been considered by the Group with its
advisers. He identifies no options, or combination of options, that realistically address the
problem of the debt wall in the time before the Scheme Maturity Date.
[207]       His conclusions, such as they are, are expressed in the most tentative language. At
best, he concludes that the options he has identified are “the most likely areas that could
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feasibly be explored by the Group” (para 2.5.6), and that one or more of the options he
identified “could be explored in combination … [with] a disposal of assets combined with a
voluntary or involuntary [amendment and extension] of facilities”. The alternatives are
discussed in generic terms and, where he lacks expertise, he defers to the view of a colleague
which is provided in the most summary terms. Any application of these to the Group is so
qualified (“may”, “could”, “if”, “if achievable”) as to be wholly unpersuasive.
[208]       Mr Rose responded in Rose 2 to inter alia the Boyle Report. I accept the grounds on
which Mr Rose rejects the Boyle Report, and in particular, the detailed reasons he provides
as to why the theoretical alternatives Mr Boyle postulates are not feasible. While an A&E is
clearly essential, Mr Rose explains that it is not itself sufficient to resolve the Group’s
financial difficulties, and that an equity raise would also need to accompany any extension
of debt maturity (see Rose 2, para 24(A)). However, Mr Rose explains (as is perhaps self-
evident) that an equity raise for paying down debt would be challenging, especially after the
Scheme Debt Facilities become current (in May 2020). A partial refinancing is not a viable
solution to the 2021 Maturity. The proceeds from disposal of non-core assets would not
suffice to repay the Group’s indebtedness. There is nothing in the Boyle Report that
undermines Mr Rose’s essential position that the Schemes are the product of “a long period
of work in looking for alternatives” and that the Proposed Transaction “is the only viable
transaction the Group has been able to identify during the time which addresses the 2021
Maturity, paves the way for a full refinancing in the medium term and has the clear support
of a significant majority of its creditors” (Rose 2, para 27).
[209]       In my view, there is considerable force in Mr Rose’s observation, that the Boyle
Report is a largely theoretical exercise without the benefit of experience in the sector or of
the Group, and that there are no consequences for Mr Boyle if he gets it wrong. It is not
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simply that Mr Boyle does not have to live with the consequences of failure; there is an air of
unreality in Mr Boyle’s speculations about alternatives. This is seemingly considered
without addressing the duties incumbent upon Mr Rose and his fellow directors (and which
they must take cognisance of) in respect of responsible trading in the face of the risk of
insolvency in the short to medium term. Furthermore, the fact that, as Mr Rose explained
(eg see Rose 2 at para 25), it took 17 months to produce the 2017 Scheme belies Mr Boyle’s
bland assumption, and on which his discussion of alternatives is premised, that the
14 months remaining before the Scheme Maturity Date would suffice.
[210]       I find that, fundamentally, there is nothing in the Boyle Report (or the other ARCM
Reports) to provide a cogent basis to challenge or undermine the Schemes or the directors’
conclusion that the Schemes are the best way forward for the Group. The majority of the
Scheme Creditors at the Scheme Meetings endorse the directors’ views. There is nothing in
ARCM’s submissions or in the ARCM Materials that persuades me that, in the exercise of
my discretion, I should disregard the views of the majorities voting at the Scheme Meetings
or the collective exercise of their commercial judgement of where their best interests lie. To
the extent that the ARCM Reports are relied on to invite the Court to consider the
commercial merits of some alternative to the Schemes, the petitioners’ and Supporting
Creditors’ submission is in my view well made that this is not relevant to the Court’s
consideration of sanction of the Schemes. It is not the function of the Court in Part 26
proceedings to adjudicate between differences of commercial judgement, which, in
substance, is what ARCM seek to do at a proof. It is indisputable that the Group as a
formidable “problem” (in the Scottish Lion-sense) in the form of the debt wall. Having
considered the Schemes proposed, and the ground of ARCM’s challenges to them with
particular care, I am persuaded that the Schemes are fair in the relevant sense. It remains for
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me to consider the impact of ARCM’s remaining grounds of challenge (and which were
presented as free-standing or not readily accommodated within the 4 stages of the Buckley
framework).
Unfairness of exclusion of ARCM from discussions in late 2019
[211]       ARCM complain that they were excluded from the late stages of the discussions
amongst the Group and its creditors. This coincided with ARCM’s disclosure of its hedge
position. The import of this exclusion might, at its highest, amount to a claim that ARCM
could not influence the outcome of the final form of the Schemes. Mr Rose explained the
commercial sensitivity of matters placed in confidence before the creditors and how
ARCM’s disclosure affected that. Be that as it may, I accept the petitioners’ and Supporting
Creditors’ submissions that this complaint is irrelevant. What the Court considers are the
Schemes to be sanctioned, not prior or alternative iterations of the same. In any event, in this
case, it is difficult to see that there was any prejudicial impact. ARCM’s final position was to
oppose the Acquisitions. As these emerged as central features of the Schemes, it was
unlikely that even continued closer involvement by ARCM would have changed that. More
importantly, once the Schemes were in their final form, there was no differential treatment
of ARCM in respect of the information placed before them and the other Scheme Creditors
(all parties had the Explanatory Statement) or in the opportunities for ARCM to express its
views. To the extent that ARCM’s complaint of exclusion was said separately to constitute a
“blot” (per para 5(4) of the first respondent’s Submissions), the foregoing comments also
apply to this argument. Any exclusion of ARCM from the final stages preceding the
petitioners finalising the form of the Schemes is not a blot on, or arising from, the Schemes.
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For completeness, I record the Supporting Creditors’ observations that at about this time
ARCM set up a website to promote the options they favoured and to garner opposition to
the Schemes.
Market volatility
[212]       ARCM advance a separate argument said to go to the overriding unfairness of the
Schemes, which was that the recent market volatility in oil prices undermines the
commercial rationale or viability of the Schemes (and that volatility subsists during the
several weeks that this opinion has been at avizandum). This is one of the many topics on
which ARCM say proof is necessary. Apart from the doubtful utility of a proof on parties’
respective predictions of future oil and gas prices (or the markets’ perception of how these
might affect the Schemes), in my view this matter is best left to be determined by the market
itself. This is appropriate because of how the different elements of the Schemes are
structured. As noted above, if the equity raise does not generate sufficient new capital, the
Acquisitions cannot be funded. The first step is the equity raise. There is no better predictor
of the success of the Schemes in the market than the market itself. Accordingly, the current
market volatility does not lead me to conclude that the Schemes fall to be refused on that
ground.
Is there overriding unfairness?
[213]       Under reference to Prudential Assurance Co Ltd [2019} EWHC 2245 (Ch), the first
respondent submits that it is always open to the Court to refuse to sanction a scheme that
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was inconsistent with an expectation of creditors, even where there was no vested right (see
para 100 of the first respondent’s Submissions). That harks back to its submission (made in
the context of its “confiscation of voting rights” submission) that promises and covenants
that were made by way of the 2017 Schemes were “empty promises” if the Schemes are
sanctioned (see para 22 of its Submissions and references there to paras 21 to 43 of Ercil 1
and to Re Old Silkstone Colliers Ltd [1954] 1 Ch 169 (“Old Silkstone”) at p 189). Having
considered these materials, I am not persuaded that the first respondent has identified a
clear and specific representation or promise by the Group made at the time of the 2017
Schemes, to the effect that the 2017 Override Agreement would be immutable, or that the
first respondent assented to the 2017 Schemes in reliance on such a promise or
representation. In Mr Ercil’s view, the 2017 Override Agreement was final and binding (see
Ercil 1 at para 43). That may have been so, but, as noted above, the 2017 Refinancing was
presented as an incremental step towards better financial health, not itself as the final means
to achieve that end. That apart, and more fundamentally, there is nothing in clause 23 or any
other part of the 2017 Override Agreement, which is the measure of the parties’ rights,
which creates this immutability. In relation to Old Silkstone, in my view, that case provides
no support for this submission. It is readily distinguishable: (i) it rose in a different statutory
context (being a reduction of capital), and therefore there was no requirement for “give and
take” to be considered; (ii) in that case there were specific representations made in the
circulars themselves (ie that the company would proceed in a particular way and would
preserve the possibility of compensation for certain stockholders), but I have concluded that
there are no like representations in this case, much less any contained in a document
equivalent in stature to a circular; and (iii) that the subsequent (third) reduction of capital in
Old Silkstone was promoted on the basis that those retained rights of the stockholders were
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worthless and it was that element of unfairness that led the court to refuse the reduction in
capital. In this case, the first respondent has not identified any specific or clear
representation or promise equivalent to that in Old Silkstone. Skilfully and subtly presented
though this argument was, it is in substance a complaint against the proposed amendment
of rights (particularly voting rights) via a scheme under Part 26. I have already addressed
the nature of the Part 26 jurisdiction which permits this.
The fourth stage of the Buckley test: Are there blots on the Schemes?
[214]       It is at the fourth stage of the Buckley test that the Court considers if there are any
“blots” on the scheme. A 'blot' is a technical or legal defect in a scheme, eg that the terms of
the scheme are inoperable or infringe some mandatory provision of law: see Re The Co-
operative Bank Plc [2017] EWHC 2269 (Ch) (at para 22, per Snowden J).
[215]       The first respondent has identified what it says are three “blots” on the Schemes.
These are:
1) the Schemes cannot validly appoint an agent or attorney to execute a
particular document (the 'Implementation Deed') and perform various other
actions on behalf of the Scheme Creditors (see Answer 4.1 (this is the power
of attorney issue” referred to earlier));
2) the Acquisitions are subject to an excessive number of conditions (see
Answer 4.2.2); and
3) the Schemes include powers of amendment which are impermissibly broad in
scope (see Answer 53.10.1)
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126
The petitioners’ undertaking, offered at the Sanctions Hearing (and recorded above) is
sufficient to address blot (3). In respect of blot (2), which in large measure repeats aspects of
ARCM’s voting rights confiscation arguments and those on market volatility (on which, see
below), I am not persuaded that this is a “blot” in the relevant sense. Complex schemes are
bound to have different elements which may be conditional on one another. I would be
reluctant to conclude that that feature of conditionality necessarily constitutes a “blot”, lest
the flexibility inherent in the Part 26 jurisdiction and the concept of what may constitute an
“arrangement” be unduly constrained. As I understand the gravamen of ARCM’s
challenge, it is the uncertainty resulting from that conditionality or that the conditionality
removes the Court’s control (per Re Lombard Medical Technologies Plc [2014] EWHC 2457 (Ch)
at para 26). In my view, there is no substance to this challenge. While elements of the
Schemes are conditional, there is legal certainty as to what will follow if the different
elements of the Schemes take effect. The Court has approved the elements of the Schemes
and the sequence and conditions on which they will take effect. There is no excessive
conditionality such as to remove the Court’s control. If it were the uncertainty which
concerns ARCM, this is simply the context in which the Schemes may take effect. In my
view, that market uncertainty is not a technical or legal defect.
The power of attorney issue: Can the Schemes validly appoint an agent or attorney on behalf of the
Scheme Creditors?
[216]       The first respondent contends that it is not competent for the Schemes to constitute
PO as an attorney under a power of attorney to execute certain deeds on behalf of the
Scheme Creditors, in the event the Schemes are sanctioned. The petitioners’ position is that
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127
the first respondent’s contention is incorrect. Both have lodged an Opinion of English
Senior Counsel.
[217]       Before turning to the first respondent’s argument, I first note the two clauses of the
Schemes on which this challenge is based, namely clauses 4.1 and 4.3. By clause 4.1 of the
Schemes, PO will be appointed as agent and attorney under a power of attorney on behalf of
the Scheme Creditors to execute the Implementation Deed (and to perform certain other
actions in relation to it). The rationale behind this provision (which the petitioners describe
as essentially a mechanical one), are as follows:
1) In order for the Schemes to become effective, the Implementation Deed must
be duly executed;
2) In theory, the Scheme could require the Scheme Creditors themselves to
execute the Implementation Deed (and to comply with any other appropriate
instructions by the Parent Company);
3) However, this approach would suffer from serious practical difficulties.
There is no guarantee that the Scheme Creditors would execute the
Implementation Deed in good time or at all. That is particularly true in
relation to a dissentient creditor; and
4) In order to avoid these difficulties, Clause 4.1 of the Schemes simply appoints
the Parent Company as agent and attorney on behalf of the Scheme Creditors
to execute the Implementation Deed (and to perform various other actions
relating to the Implementation Deed).
Clause 4.3 of the Schemes provides as follows:
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128
The authority granted under Clause 4.1 above in favour of an Attorney under the
Schemes shall also be treated for all purposes whatsoever and without limitation as
having been granted by a deed under English law.
The first respondent’s ground of challenge to the use of these to constitute PO an attorney of the
Scheme Creditors
[218]       Under reference to section 1 of the Powers of Attorney Act 1971 (“the 1971 Act”) and
section 47 of the 2006 Act, the first respondent submits that as a matter of English law “a
Scottish company signing an English law deed by Power of Attorney would need an English
law power of attorney to do so” (Answer 4.10). Section 1(1) of the 1971 Act provides “(1) An
instrument creating a power of attorney shall be executed as a deed by the donor of the
power”. Section 47(1) of the 2006 Act provides:
“(1) Under the law of England and Wales or Northern Ireland a company may, by
instrument executed as a deed, empower a person, either generally or in respect of
specified matters, as its attorney to execute deeds or other documents on its
behalf...”.
[219]       The first respondent’s short point is that, unless the Scheme Creditors actually
execute a deed appointing PO as their attorney for the purpose of executing the
Implementation Deed, then PO will not be validly appointed for that purpose. A scheme
with such a clause is not a deed granted by the donor of the power (ie the Scheme
Creditors), as section 1 of the 1971 Act requires. It submits that the issue can only be
resolved with the benefit of expert evidence of English law and it has produced a short
Opinion of David Alexander QC, of South Square Chambers, (“the Alexander Opinion”).
Consistent with his letter of instruction, which simply asked him to identify and recite the
relevant parts of the 1971 Act and the 2006 Act concerning powers of attorney and to
consider the effect of these provisions on the Schemes (and especially clause 4 and the
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proposed Implementation Deed), Mr Alexander addresses only these provisions. (He gives
no consideration, for example, to section 899 of the 2006 Act.)
[220]       Under reference to section 1(1) of the 1971 Act, Mr Alexander notes that it is a
requirement of English law that an appointment of a power of attorney can only be made by
deed executed by the donor of the power (para 13 of the Alexander Opinion) and that this
requirement extends to a company donor of the power (para 14). He notes that the same is
true if a company wishes to appoint a person as its attorney (per section 47 of the 2006 Act).
He also notes passages from the 10th edition of Bowstead on Agency (namely, article 10 at
page 70 and the comment thereon) and the case of Powell v London & Provincial Bank [1893] 2
Ch 555 which is quoted in the comment, and which are to the effect that an agent authorised
to execute a deed on behalf of his principal under a power of attorney must be given that
power of attorney by a deed.
[221]       From these he concludes that, if the Schemes were governed by English law,
clause 4.1 of the Schemes would “not appear to be a valid appointment” of PO as an
attorney of the Scheme Creditors (para 18). This is because a deed of the granter (ie, here,
each of the Scheme Creditors) is required; the Schemes are not such a deed. He refers to an
observation of Snowden J in Re Van Ganswewinkel Groep BV [2015] EWHC 2151 (Ch) (at
para 64), in which he appeared to accept this as a practical mechanism. However,
Mr Anderson points out (at para 21 of the Anderson Opinion) that this observation was
made without the benefit of argument or without the Court’s attention having been drawn
to the 1971 or 2006 Act provisions noted in the Alexander Opinion and which disallow this
as a practical solution.
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130
[222]       The petitioners invite the Court to reject that submission and they rely on the opinion
they have obtained from Daniel Bayfield QC (“the Bayfield Opinion”), also of South Square
Chambers. Mr Bayfield QC was asked to consider:
“whether (as a matter of English Law) a Part 26 scheme of arrangement is capable of
granting an English law power of attorney to the scheme company such that the
scheme company may validly sign deeds, agreements and other documents
connected with implementation of the scheme on behalf of the scheme creditors?”
In Mr Bayfield’s opinion, a Part 26 scheme of arrangement can have that effect (although he
acknowledges (at para 14) that there is no binding authority on the point). He observes that
it has become common for schemes of arrangement promulgated before the courts in
England and Wales to include provisions of the type the first respondent challenges in these
applications and, further, that it is implicit that in sanctioning schemes with such clauses,
that the judges of the Chancery Division of the High Court of England and Wales consider
that a scheme of arrangement is capable of granting an effective authority or power of
attorney to the scheme company to enter into ancillary documents on behalf of creditors
bound by the scheme (para 15). He notes, too, that a number of judgments make it clear that
it is commonplace for the operative provisions of schemes proposed within the context of
restructuring an insolvent company to provide a like mechanism for execution of a number
of restructuring documents by an attorney appointed under the scheme to act on behalf of
scheme creditors (para 16).
[223]       What leads Mr Bayfield to this conclusion is that a scheme of arrangement is given
effect by a combination of the Court’s order sanctioning the scheme (and which is “binding
on … all creditors”: section 899(3)(a)) and its delivery to the registrar of companies
(section 899(4)). The essential point he makes is that a scheme has binding force not as a
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131
matter of contract, but by virtue of the 2006 Act. In support of that he cites Lord Hoffman’s
observation (in Kempe v Ambassador Insurance Co [1988] 1 WLR 271 at 276D-E)) that it is the
Act “which gives binding force to the scheme”. Upon sanction of a scheme by a court and
the delivery of a copy of the court order to the registrar, the scheme becomes effective
according to its terms. Accordingly, there is no need for compliance with any additional
formalities as would be required under the general law. So, for example, there is no need for
offer or acceptance (as would be required under the general principles of contract law) and,
by a parity of reasoning, there is no need to comply with the section 1 of the 1971 Act.
Accordingly, clause 4.1 is sufficient in its terms (so long as the Schemes are sanctioned and
the court orders duly delivered to the registrar).
[224]       In relation to clause 4.3, which provides that authority granted under clause 4.1 shall
be treated for all purposes whatsoever” as having been granted by a deed under English
law, in Mr Bayfield’s view, this is a “belt and braces” provision because clause 4.1 is
sufficient in his view. A clause such as clause 4.3 creates a fiction that the requisite power of
attorney was granted by deed. This, too, is given binding force by the 2006 Act.
[225]       For completeness, Mr Bayfield notes, under reference to Phillips v Allan (1828) 108 ER
1120 (per Bayley J at 1121)), that regardless of the legality and effectiveness of clauses 4.1 and
4.3 as a matter of English law, a Scottish scheme sanctioned under the 2006 Act (an Act of
the UK Parliament) “would automatically be recognised in England”.
[226]       Turning to the absence of binding precedent in England on the point at issue, he
notes that the point has never been raised by any applicant company, by opposing creditor
or by any judge considering a scheme promulgated before the English High Court, and that
is notwithstanding (i) that there is an obligation to raise issues going to jurisdiction or other
“roadblocks” (as this issue would be); (ii) that a company proposing a scheme has a duty to
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132
make full and frank disclosure of all material facts (which would include this issue); and (iii)
that traditionally the judges themselves will raise such jurisdictional and other issues ex
proprio motu. Mr Bayfield fairly and rightly accepts that this is not determinative, and nor is
the fact that many schemes in England containing a similar clause have been sanctioned.
(He refers to the schedule appended to the Bayfield Opinion identifying 12 schemes
approved in the past two years with such clauses, including the 2017 Schemes approved by
the Court of Session). Nonetheless, Mr Bayfield is fortified in his view that clauses 4.1 and
4.3 are considered to be inoffensive by judges and Senior Counsel eminent in this field, and
he cites observations expressly about power of attorney clauses in four recent cases
determined by extremely experienced and careful judges: T&N Limited [2007] 1 All ER 851
(per David Richards J (as he then was) at para 55); Re Van Gansewinkel Groep Ltd, cit supra, (per
Snowden J at para 16); Re Global Garden Products Italy SpA [2017] BCC 637 ((per Snowden J at
para 11); and Noble cit supra (per Snowden J at para 24). He considered it unlikely that judges
of this eminence, or the skilled Senior Counsel appearing before them in such cases, would
be unaware of the 1971 Act, and “close to inconceivable” that these judges would have all
entirely missed this issue (or “roadblock”). For completeness, he notes that many of the
leading firms in this area of practice (among whom are the first respondent’s London
Agents) have advised and acted for scheme companies which have promulgated schemes
containing clauses similar to clauses 4.1 and 4.3 of the Schemes.
Consideration on the power of attorney issue
[227]       I am not persuaded that the power of attorney issue gives rise to any issue of English
law. The short point is that clause 11.1 of the Schemes provides that they are governed by
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133
Scots law and, furthermore, the interpretation or effect of Part 26 of the 2006 Act, as it bears
on a scheme of arrangement being considered by the Scottish Courts, are matters for the
Scottish Courts. No party suggested that, on the application of Scots law, clauses 4.1 or 4.3
gave rise to any “blot”. Nor was it suggested that there was any provision in Scots law akin
to section 1 of the 1971 Act. By virtue of section 899(3) of the 2006 Act, a scheme of
arrangement binds all the creditors regardless of whether they consent to it (and regardless
of whether they perform any formal act to record their consent). And I have noted above,
Mr Bayfield’s observation that a Scottish scheme sanctioned by this Court would
automatically be recognised in England (a point Mr Anderson did not address). That is
conclusive of this issue. Nonetheless, in the event that English law did properly apply to the
power of attorney issue, it is right that I express my opinion on the two opinions parties
provided.
[228]       Mr Bayfield and Mr Anderson are both Senior Counsel experienced in this area of
practice. I need not rehearse their credentials. However, on the power of attorney issue I
find the reasoning in the Bayfield Opinion to be wholly persuasive. Schemes of
arrangements under Part 26 are creatures of statute. They are given binding force by virtue of
the 2006 Act. As Lord Hoffman observed, once a scheme becomes effective, its provisions
will be binding on their terms by operation of the 2006 Act. In respect of the power of
attorney issue, upon the Schemes becoming effective, clause 4.1 itself grants the irrevocable
authority. (Absent that clause (and clause 4.3) a separate power of attorney would be
required.) I also accept Mr Bayfield’s position that clause 4.1 alone suffices and that
clause 4.3 is another means by which the same practical result could be effected - it is a “belt
and braces” provision. Accordingly, even as a matter of English law, there is, therefore, no
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134
need for a separate power of attorney or one which must comply with section 1 of the 1971
Act.
[229]       Consistent with the scope of his instruction, Mr Anderson referred to section 47 of
the 2006 Act. In the present context, this is a red herring. Section 47 concerns the grant of a
power of attorney by a company; by contrast, the power of attorney issue relates to the grant
of powers of attorney to a company (PO). Perhaps mindful that he was only asked to
consider the relevant provisions of inter alia the 2006 Act “concerning formalities of powers
so attorney” and to “consider the effect of these provisions” (emphasis added),
Mr Anderson is tentative in his conclusions (“would not appear to be a valid
appointment.”). However, Mr Anderson did not address himself to the precedents and
practice narrated by Mr Bayfield (see paras 51 to 61 and the table of recent cases sanctioning
schemes (and the text of similar clauses) appended thereto). More importantly,
Mr Anderson did not consider section 899(3) of the 2006 Act, which in my view is
determinative of this issue if English law is relevant. For completeness, I note that
clause 11.1 of the Schemes provides that the Schemes are governed by and are construed in
accordance with the laws of Scotland. The reasoning underpinning Lord Hoffman’s
comments applies with equal force in Scotland. The efficacy of the Court’s order sanctioning
the Schemes is governed by section 899(3) and there is no doubt that the orders of this Court
under Part 26 are recognised in England and Wales. There was no suggestion by Mr
Anderson that, once the order of this court is brought into effect by intimation to the
Registrar of Companies, it would not be given effect to eg on the grounds of repugnancy or
public policy.
[230]       For these reasons, I find that neither the terms of clause 4.1 or of 4.3 constitute a blot
on the Schemes.
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135
Other Issues
ARCM’s submission that the Reporter erred in law
[231]       While ARCM maintained that the Reporter has erred in his understanding of the
law, it is not necessary to address this. His approach to the law, and indeed to any issue, is
not binding on the Court. In any event, I have fully and carefully considered all issues and
materials (including those, such as the ARCM Materials, which he did not comment on). I
have also had the benefit of the parties’ written Submissions, the many authorities produced
to me (not all of which I have recorded in this Opinion) and three days of argument at the
Sanctions Hearing.
The relevance of the ARCM hedge
[232]       The hedge issue generated a considerable amount of heat and, it must be said, ill-
feeling amongst the parties. The petitioners and the Supporting Creditors cast doubt on
ARCM’s good faith and motives and urge me to discount ARCM’s complaints on this basis.
ARCM put in issue whether it is a hedge or a short, another issue they contend cannot be
resolved without proof. I am not persuaded that the hedge has any relevance to the issues
the Court has addressed.
First respondent’s motion for a proof
[233]       Finally, I consider the first respondent’s motion for a proof, which was made at the
hearing on 8 March and renewed at the end of the Sanctions Hearing. Throughout my
consideration of the many issues, I have also borne in mind the first respondent’s motion for
a proof and its contention that there are areas of disputed fact necessitating this mode of
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136
disposal. It will be apparent that I have not relied on the Report to resolve the issues; the
Reporter’s inability to resolve contested matters was one of the bases on which the first
respondent sought a proof (see para 156 of its Submissions). It will also be apparent from the
foregoing, that I have found that the matters canvassed in the ARCM Reports (and other
ARCM Materials) are not relevant to the issues to be determined by this Court, properly
analysed. Indeed, on none of the issues the first respondent identified (eg in its Note of
Proposals for Further Procedure or in its Submissions) do I find that evidence is either
necessary or would assist the Court in its determination of the issues. In relation to the
power of attorney issue, had I found that this was one which fell to be determined by
English law, I would not have considered a proof necessary to resolve this. While Senior
Counsel suggested that parole evidence was necessary to enable me to assess the credibility
and reliability of Mr Bayfield and Mr Anderson, I very much doubt this would have assisted
the Court: both are experts and it is rare for credibility and reliability to be an issue, much
less to be material, in the consideration of conflicting expert evidence. The critical factor in
preferring the Bayfield Opinion to the Anderson Opinion, is the thoroughness and cogency
of the reasoning of the former. No proof was needed, even on this issue.
Disposal
[234]       It follows that I will sanction the Schemes (as amended by a minor amendment the
petitioners proposed in the course of the Sanctions Hearing (and which no party opposed)).
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I will reserve meantime the question of expenses and will further reserve and continue the
other outstanding motions to a by order afterwards to be fixed.



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