The first Restructuring Plan to exclude out-of-the-money creditors or members from voting – the Smile Telecoms Holdings Limited Restructuring Plan

Summary

On 30 March 2022 the High Court sanctioned a restructuring plan for Smile Telecoms Holding Limited in which the court for the first time allowed the exclusion of all but one class of creditors from voting on a restructuring plan. The sanction hearing considered several salient issues around challenges made to a plan by a creditor or shareholder, questions of jurisdiction and the concept of a "compromise or arrangement" in Part 26A of the Companies Act 2006 ("CA 2006").  

Background

Smile Telecoms Holding Limited (the "Company") is incorporated in Mauritius but has its centre of main interests (or "COMI") in England. The Company operates, along with its operating subsidiaries in Tanzania, Nigeria, Uganda and DRC, an internet and telecoms business. 

The Company is the borrower under an English law super senior facility provided by 966 CO. S.a.r.l ("966") for USD 63.6 million (the "Super Senior Facility"). The Company also has a number of senior facilities (totalling USD 315 million at the end of 2021) owing to a number of banks including African Export-Import Bank ("Afreximbank").

The Company had its first restructuring plan sanctioned in March 2021 which aimed to facilitate the provision of urgent funding by 966 and to enable the Company to conduct a solvent disposal of the Company's assets. This was the first restructuring plan to use the cross-class cram-down mechanism.

Subsequently, the Company tried to sell its operating subsidiaries or their assets to allow the Company to repay the senior lenders and super senior lender. However no offers were received that would provide the Company with sufficient funds to repay its financial indebtedness. Consequently, the Company experienced severe cash flow issues and was unable to pay its trade creditors or the super senior facility which matured on 31 December 2021. As a result, a second restructuring plan was negotiated.

The Second Restructuring Plan

In its Second Restructuring Plan ("RP2") the company was seeking the following in order to provide it with the necessary breathing space and additional liquidity to continue its business operations and to seek a disposal of its assets:

• the injection of additional funding by 966 of up to USD 35.6 million;
• the acquisition of control of the Company by 966;
• the transfer of the Senior Facilities to 966 as the new lender for nominal consideration and the amendment and restatement of such facilities into shareholder loans;
• the compromise of senior liabilities and the release of security in return for a £10 million payment (pro-rated) to senior lenders and the compromise of additional unsecured claims; and
• the issuance of a contingent value rights instrument in favour of 966 and the senior lenders.

At the convening hearing for RP2 the Company advised the court that the relevant alternative should the plan not be approved was that the Company would enter administration and the operating subsidiaries would enter liquidation or a similar insolvency process in their country of incorporation. The Company stated that it was likely that only 966 would receive a dividend in the administration as all other stakeholders would be out-of-the-money.

If RP2 was sanctioned the result would be that 966 would become the owner of the Company free of the debt owed to the other major creditors.

Challenge to a restructuring plan on valuation grounds

Producing its own contrasting evidence, Afreximbank challenged RP2 on the basis that the Company's valuation evidence showing that it was out-of-the-money was incorrect. However, Afreximbank only raised such concerns within correspondence and never raised a formal challenge within court. Mr Justice Snowdon described this approach as "unhelpful" and stated that where a stakeholder wished to "oppose a scheme or plan based on a wrong, they must stop shouting from the spectators' seats and step up to the plate". The court set out a clear process to be followed should a stakeholder wish to make a challenge on valuation grounds - a stakeholder should:

• ·obtain any financial information from the company that may be required, either on a voluntary basis or by making a timely disclosure application;
• file its own expert evidence and instruct the expert to provide a joint report where possible;
• make the expert available for cross-examination; and
• attend the hearing at the appropriate stage in order to address any points which need determining to assist the court.

First order excluding out-of-the-money creditors or members from voting

At the convening hearing the Company sought permission from the court pursuant to s.901C(4) CA 2006 to convene only a single class on the basis that no other creditor or member had a genuine economic interest in the Company. The relevant section states that a company can seek an order to exclude a class of creditors or members if it can prove to the court's satisfaction that the class does not have a genuine economic interest in the company.

Mr Justice Miles set out the factors to be taken into account when considering an order pursuant to s.901C(4) CA 2006:

• first, in considering whether a creditor or member (or a class thereof) has a genuine economic interest in the company the court considers the position by reference to the relevant alternative for the company if the restructuring plan is not sanctioned;
• second, the court should address the question by applying the civil standard of the balance of probabilities; and
• third, the court may conclude that the evidence before it is not "sufficiently complete or satisfactory" to enable the court to reach a view. If the court does have sufficient evidence that none of the members of the relevant class have a genuine economic interest then it may properly conclude that there is no purpose of convening a meeting of that class.

At the sanction hearing, Mr Justice Snowden noted that the power in section 901C(4) CA 2006 to completely exclude a class from voting was "even more draconian" than the cross-class cram-down power (where a dissenting creditor class can be bound by a restructuring plan proposal as long as no member of the dissenting class would be any worse off than in the relevant alternative). As such, Mr Justice Snowden commented that it was "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".

On the evidence before it Mr Justice Snowdon held there was no basis for him to re-evaluate the decision of Mr Justice Miles at the convening hearing that (other than 966) the plan participants had no genuine economic interest in the Company and therefore it was only necessary to summon a meeting of 966 as the lender under the Super Senior Facility to vote upon the plan.

International recognition

At any sanction hearing even if a restructuring plan has been approved by the required number of voting creditors the court still has discretion as to whether to sanction the plan and will consider any potential issues that may affect its decision.

In this case the court considered: (i) whether the Company had sufficient connection to the UK; (ii) whether it was appropriate for an English court to sanction a restructuring plan that would alter the constitution and share capital of a company incorporated in Mauritius; (iii) whether the provisions of the plan that were intended to result in the alterations to the Mauritian company's constitution and share capital were likely to achieve their result; and (iv) if the restructuring plan would have overseas recognition.

Mr Justice Snowdon was satisfied on the evidence that the Company had moved its COMI to the England and additionally the majority of the debts that were to be compromised in the plan were governed by English law. The Company therefore had a sufficient connection to the UK.

Mr Justice Snowdon held that it was "tolerably clear" that the English court had the jurisdiction to sanction a plan or scheme that would alter the constitution and share capital of an overseas company. If the court was satisfied on the evidence before it that the alterations required to change the constitution and share capital could be achieved in the overseas jurisdiction by a process (other than through the use of a parallel scheme) that was "compliant with local laws and acceptable to local courts" then the absence of a parallel plan or scheme proceeding should not prevent the court from sanctioning the plan. Justice Snowdon held, on the basis of local law evidence, that the provisions of the plan intending to achieve the alterations to the Mauritian company were likely to achieve their results through the use of a power of attorney.

The court was also satisfied on the basis of expert evidence that RP2 would be recognised in Mauritius, Nigeria and South Africa and therefore it was likely to be upheld should any dissenting creditors raise a challenge in those jurisdictions.

Compromise or arrangement

Mr Justice Snowdon considered whether the court had the jurisdiction to sanction the restructuring plan. The jurisdiction test is set out in s.901A CA 2006 and requires the following to be satisfied: (i) that the company has encountered or is likely to encounter financial difficulties that are or will affect its ability to carry on business as a going concern; and (ii) a compromise or arrangement is proposed between the company and its creditors (or a class of them), or to its members (or a class of them), and the purpose of the compromise or arrangement is to eliminate, reduce or prevent or mitigate the effect of any of the financial difficulties.

For a scheme of arrangement under Part 26 CA 2006 to be sanctioned there must be a "compromise or arrangement" which has been broadly interpreted to mean an element of "give and take" with each class of creditors or members bound by the scheme. A scheme will not fulfil this requirement if there is a surrender or expropriation of rights of a class of creditors or members without "compensating advantage".

Mr Justice Snowdon in applying this approach to restructuring plans considered that the requirement for there to be no expropriation of rights without compensating advantage was a potential issue in this case given that RP2 differed to the Company's first restructuring plan as: (i) the existing Preference Shares and Ordinary Shares were to be converted into deferred shares which can simply be redeemed for nominal consideration; and (ii) the claims of the Other Plan Creditors, the Subordinated Shareholder Creditors and the Contingent Claims Creditors (as defined in the judgment) were to be released in their entirety, with a small payment of USD10,000 to be shared between the members of the class.

Mr Smith QC (on behalf of 966) submitted that the principles of the expropriation of rights and compensating advantage may not apply to restructuring plans in the same way as it does to schemes without some form of modification due to the court having the authority to bind a class of dissenting creditors on the basis that none of the dissenting class would be worse off in the alternative (i.e. a "cross-class cram down"). As such, Mr Smith QC argued that if class of creditors or members could receive nothing under the relevant alternative then it should follow that a restructuring plan could also provide them with nothing in exchange for the release or cancellation of their existing rights.

Mr Justice Snowdon held it was unnecessary for him to decide upon Mr Smith QC's argument in this particular case as the ex gratia payments being made to plan participants were to be characterised as payments being made in exchange for the modification or extinction of their rights under the restructuring plan and therefore could be taken into account when considering if there was any "compensating advantage".

As far as the amount of these payments were concerned, it was to be accepted that all of the Plan Creditors (except for 966 in relation to the Super Senior Facility) and all of the Plan Members would be out-of-the-money in the relevant alternative and their current rights gave them no genuine economic interest in the Company. As such the existing rights that were to be surrendered or compromised under the restructuring plan were worthless and any such payment, even if small, would be sufficient to mean the plan was not an expropriation of their rights without compensating advantage.