Factual and Procedural Background
This opinion concerns an application by Company A for an order under section 899 of the Companies Act 2006 sanctioning a proposed scheme of arrangement between Company A and holders of certain loan notes issued by Company A (the 'Scheme Creditors'). The purpose of the Scheme is to implement a financial restructuring of Company A, which has encountered financial difficulties, as the initial step in restructuring the wider group of companies.
Company A is incorporated in the Netherlands and is part of a group engaged in energy-related activities, including coal mining, power generation, and electricity distribution, primarily serving customers in Ukraine and other regions. Company A's role is to raise finance through capital markets and lend these funds to other group companies. The liabilities of Company A are limited to its obligations under the loan notes, and its assets consist of debts owed by other group companies.
The loan notes subject to the Scheme (the '2015 Notes') were originally issued in 2010 with a principal amount of $500 million, bearing 9.5% interest per annum, maturing on 28 April 2015. These notes were unsecured but guaranteed by other group companies. In 2013, the principal was reduced to $200 million after Company A repurchased $300 million of the notes. Initially governed by New York law, the governing law was changed to English law shortly before the sanction hearing.
The group has faced financial difficulties due to the devaluation of the Ukrainian currency against the US dollar and euro, as well as unrest in Ukraine disrupting operations. The 2015 Notes were due to mature on 28 April 2015, but Company A lacked funds to repay them, which would have triggered defaults and potential insolvency proceedings for Company A and guarantors.
Company A proposed the Scheme to restructure the 2015 Notes with the support of noteholders, involving Company A acquiring and cancelling existing notes, issuing new notes for 80% of the par value with a 2018 maturity and the same interest rate, and paying cash for the remaining 20% of the par value.
The court granted permission to convene a single meeting of Scheme Creditors, held on 23 April 2015, at which an overwhelming majority voted in favour of the Scheme. The sanction hearing was then scheduled for 24 April 2015, shortly before the maturity date of the notes.
Legal Issues Presented
- Whether the court has jurisdiction under section 899 of the Companies Act 2006 to sanction the Scheme involving a foreign company incorporated in the Netherlands.
- Whether the statutory requirements for sanctioning the Scheme, including class composition and voting thresholds, have been satisfied.
- Whether the Scheme is fair and appropriate for sanction in the exercise of the court’s discretion.
- Whether the Scheme will have practical and effective operation across relevant jurisdictions.
Arguments of the Parties
Appellant's Arguments
- The court has jurisdiction because the governing law of the loan notes was changed to English law, which creates a sufficient connection with the English court.
- The statutory requirements for convening a single class meeting and for voting thresholds under section 899(1) have been met, with a large majority of Scheme Creditors voting in favour.
- The Scheme is fair, and the majority voting in favour represent the interests of the class bona fide and without coercion.
- The Scheme will be effective internationally, supported by legal opinions confirming enforceability in the Netherlands, other jurisdictions, and under US law via Chapter 15 of the Bankruptcy Code.
- Opposition from certain parties was either withdrawn or not substantiated, and there is no reason to refuse sanction.
Opposing Party's Arguments
- One opposing party, a hedge fund specializing in distressed debt, initially appeared to oppose the Scheme and sought cross-examination of witnesses but withdrew opposition shortly before the sanction hearing.
- Another entity sent a detailed letter alleging deceit, bad faith, manipulation, and coercion by Company A, urging abandonment of the Scheme, but did not appear at the hearing or present evidence.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Drax Holdings [2004] 1 WLR 1049 |
Jurisdiction requires sufficient connection with England; foreign companies can be wound up under Insolvency Act 1986. |
Supported the proposition that English law governing the notes creates sufficient connection for jurisdiction. |
| Re Primacom Holding GmbH [2011] EWHC 3746 (Ch) |
English law as governing law of debt instruments is sufficient connection for court jurisdiction. |
Reinforced the principle that governing law change to English law supports jurisdiction. |
| In Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch) |
Similar to Primacom, confirming governing law connection for jurisdiction. |
Further confirmed jurisdiction based on governing law. |
| In Re Magyar Telecom BV [2013] EWHC 3800 (Ch) |
Effectiveness of governing law change and practical effect of schemes of arrangement. |
Used to support the validity and effect of the governing law change and the Scheme’s enforceability. |
| Re APCOA Parking Holdings GmbH [2014] EWHC 3849 (Ch) |
Consideration of change of governing law shortly before sanction hearing and its sufficiency for jurisdiction. |
Court accepted governing law change as sufficient connection despite timing and dissent. |
| Re Lehman Brothers International Europe [2009] EWCA Civ 1161 |
Scheme of arrangement can release guarantee obligations related to principal debt. |
Supported the release of guarantee obligations under the Scheme. |
| Re La Seda de Barcelona SA [2011] 1 BCLC 555 |
Similar principle on guarantee obligations under schemes. |
Reinforced the ability of the Scheme to affect guarantees. |
Court's Reasoning and Analysis
The court first considered whether it had jurisdiction to sanction the Scheme involving a foreign company incorporated in the Netherlands. The court held that jurisdiction under section 899 of the Companies Act 2006 requires a sufficient connection with England. The court found that the change in governing law of the 2015 Notes from New York to English law, effected by noteholders' consent shortly before the sanction hearing, created such a sufficient connection. This was supported by established case law confirming that governing law of debt instruments is a valid basis for jurisdiction.
Additional factors supporting jurisdiction included the existence of guarantees governed by English law, the relocation of Company A's centre of main operations to England, and Company A's substantial assets in England. The court was satisfied that the Scheme would have practical effect internationally, supported by legal opinions regarding enforceability in relevant jurisdictions and the intention to seek relief under US bankruptcy law.
The court examined the class composition and voting procedures, concluding that the single class of Scheme Creditors was appropriate since their rights were uniform, and the voting majority was substantial and fairly representative. There was no evidence of coercion or bad faith among the majority voting in favour.
Regarding the exercise of discretion to sanction the Scheme, the court considered the opposition raised by certain parties. One opposing party withdrew opposition before the hearing, and another submitted a letter with unsubstantiated allegations but did not appear at the hearing. The court found no credible opposition and no reason to refuse sanction.
Holding and Implications
The court SANCTIONED THE SCHEME, thereby approving the proposed financial restructuring arrangement between Company A and the Scheme Creditors.
The direct effect of this decision is to enable Company A to implement the Scheme, avoiding an event of default on the 2015 Notes and potential insolvency proceedings. The Scheme will restructure the debt obligations with the support of the creditors, providing Company A with financial stability in the short term. No new legal precedent was established; the decision applied established principles regarding jurisdiction, class composition, and the court’s discretion to sanction schemes of arrangement.