Smile Telecoms Holdings Limited (“Smile”), a Mauritian company, has recently had its second restructuring plan sanctioned by the High Court in England. The case contains some important markers for those involved in restructuring plans, particularly those plans which involve international elements or which seek to prevent out-of-the-money creditors from voting on the plan.
Smile’s first restructuring plan had not achieved the desired outcomes and Smile was facing formal insolvency. A new restructuring plan was proposed which provided an analysis that showed creditors would be better off under the terms of that plan, than in a formal insolvency.
This case contains a number of useful findings from the court on the following issues:
- out-of-the-money creditors
- creditor objections
- alteration of foreign member’s rights
- expert evidence
It was submitted that in a formal insolvency, only the most senior secured creditor 966 Co. S.à.r.l (“996 Co”) would receive any payment, gauged to be between 45-60% of the amounts owed to it.
At the convening hearing Mr Justice Miles was asked to convene a meeting of just one class of creditors comprising solely of 996 Co. In approving the one-class meeting Mr Justice Miles summarised the principles the court should consider when excluding creditors from voting:
- consider a creditor’s genuine economic interest by reference to its likely position in the relevant alterative procedure e.g. administration;
- the court should address that question by applying the balance of probabilities; and
- if the court is satisfied on the evidence, that none of the members of the relevant class has a genuine economic interest in the company, then it “may properly conclude that there is no purpose to be gained from requiring any meeting of that class”. However Mr Justice Miles also cautioned that the evidence might not be “sufficiently complete or satisfactory to enable the court to reach a concluded view”.
Lord Justice Snowden at the sanction hearing (sitting as an additional judge of the High Court) re-visited this decision, endorsed Mr Justice Miles’ summary of considerations (particularly the cautionary note in limb 3) and also noted that it was clear that other creditors were out of the money. He added that whilst there was much attention on the “cram down” power in restructuring plans:
“the power in section 901C(4) to exclude classes of creditors or members from voting at all on the basis that their views are essentially irrelevant to the ultimate decision whether to sanction a plan, so that they do not even need to be summoned to a meeting, is even more draconian. It is therefore of very considerable importance that the court should be entirely satisfied that it is appropriate to make an order under section 901C(4) at the convening stage”.
This is a helpful example of the court exercising its power to convene a one-class meeting, where appropriate, whilst also recognising the draconian nature of the provisions and the importance of careful consideration in exercising the power.
The Afreximbank objection
An African creditor, Afreximbank, was not in favour of the proposed plan. Solicitors for Afreximbank had written to Smile’s lawyers prior to the convening hearing, disputing Smile’s stance that only 966 Co was going to receive anything in a formal insolvency. Smile maintained its stance and wrote back confirming this.
The convening hearing went ahead and as noted above, Mr Justice Miles made the order to convene a meeting of one-class of creditor.. Afreximbank neither attended the convening hearing, nor sought permission to appeal his decision under section 901C(4). The creditor meeting went ahead and 966 Co voted in favour of the Plan.
Prior to the date set for the sanction hearing, Smile’s solicitors received a further letter from solicitors for Afreximbank attaching a report, which placed a much higher valuation of the relevant assets to support the argument that their client and other senior lenders were not out-of-the-money and that accordingly the Plan was unfair to the senior creditor group. When the sanction hearing did proceed, Afreximbank again elected not to appear.
Lord Justice Snowden highlighted that whilst any company proposing a restructuring plan must bring all relevant matters to the attention of the court, including arguments against the plan, that did not extend to an obligation to advance “full argument against itself”. He noted that Smile disagreed with the Afreximbank expert report, and had its own expert evidence explaining why that report was considered to be incorrect.
He also added it was not realistic or fair to expect judges to conduct detailed factual investigations into the valuation evidence, or engage in a valuation challenge without help from the expert who prepared the rival report. He went on to say if a creditor (or member) wishes to oppose a plan based on valuation, “they must stop shouting from the spectators’ seats and step up to the plate”. He commented that the correct process for a creditor to object would be to:
- obtain any financial information from the company required, either on a voluntary basis or by making a timely disclosure application;
- file expert evidence, instruct the expert to engage in the production of a joint report, and make the expert available for cross-examination; and
- attend the hearing(s) and make its challenge at the appropriate stage e.g. where an order is sought under section 901C(4), make representations at the convening stage; where an order sought is under section 901G, make representations at the sanction hearing.
Considering the rights of members in overseas companies
The restructuring plan affected the rights of Smile’s shareholders and involved alterations to the constitution and share capital of Smile. It should be noted that here, there was no parallel plan in Mauritius, but the alterations could be achieved by an alternative local process compliant with local laws. Lord Justice Snowden stated that the key consideration was whether “the procedure envisaged under the Plan for altering the constitution and share capital of Smile using the power of attorney conferred under the Plan, will be acceptable and effective in Mauritius”. This he concluded, would be a matter of expert evidence, which, ultimately, the court accepted.
Accordingly, in this case, the plan was sanctioned which would, via the process approved in the plan, affect and alter the rights of the members of Smile.
The Civil Procedure Rules (“CPR”) clearly set out what is required from an expert to make a compliant report for use in proceedings. In this case, the evidence required fell short and orders were made for compliant reports to be submitted post-sanction hearing and before the judgment was handed down.
It is important that anyone dealing with restructuring plans is familiar with the CPR requirements when engaging an expert, and ensuring that their report is compliant before it is submitted to court.
This case is another example of clear and robust guidance being provided and/or endorsed by the judiciary which in this case covered a wide range of issues including creditor challenges, expert evidence, international aspects, and the application for a one-class meeting.
Updated Quick Guide: Restructuring Plans: Restructuring Foreign Companies in England