First UK restructuring plan approved that excludes all but one group of creditors

It is the first time the court has approved a restructuring plan on this basis since the restructuring plan was introduced as a new form of restructuring tool in June 2020.

• High Court confirms principles relevant to future restructuring plan applications that have the effect of excluding certain creditors from voting.
• The decision also paves the way for UK restructuring plans to be used as a tool to compromise the rights of creditors and members of a company incorporated outside the UK.
• Ruling in the matter of Smile Telecoms Holdings Limited follows separate convening and sanctions hearings before the High Court.

The company

Smile Telecoms Holdings Limited (Smile) is a company incorporated in Mauritius and is the holding company of an internet and telecoms business operating in Tanzania, Nigeria, Uganda and the DRC. Smile suffered significant financial distress as a result of the Covid-19 pandemic, the devaluation of the naira, Nigeria’s currency, and pressure from competitor pricing. 

In early 2021, Smile proposed a restructuring plan to provide additional short-term funding and implement a sale of the business (the first RP).

The first RP was not successful, resulting in non-binding offers for part of the business only. In December 2021, Smile proposed a second restructuring plan to inject liquidity, discharge certain debts and transfer the shares to the company’s super senior lender, 966 Co. S.à.r.l (the super senior lender). If the court did not approve the second restructuring plan, the likely or “relevant” alternative was that Smile’s lenders would enforce their security and Smile would go into administration. The financial evidence showed that in an administration there would be no assets to repay any creditor below the super senior lender and therefore, all other stakeholders were “out of the money”.

Excluding ‘out of the money’ stakeholders

Under the Companies Act 2006 (the Act), all creditors and members whose rights are to be affected by the restructuring plan must be allowed to participate in voting to approve the plan. That is the case unless the court exercises its power under section 901C(4) of the Act, which permits a court to exclude certain members and creditors if the court is satisfied that they do not have a genuine economic interest in a company.

Smile requested that the court exercise its power and only allow a single creditor –  the super senior lender – to vote on the plan because no other stakeholders had a genuine economic interest in the company as they were all out of the money. 

At the convening hearing, the court agreed to exclude all other creditors and members from voting on the plan. This is the first time that the court has exercised this power in relation to a restructuring plan. 

The court said that the following principles were critical in deciding whether to exercise its powers:

• in considering whether a stakeholder has a genuine economic interest in the company, the court will consider the position by reference to the “relevant alternative” for the company in the event that the restructuring plan is not sanctioned; and
• at the convening hearing, the court may decide that there is not sufficient or satisfactory evidence to exclude a group of stakeholders from voting. The court is unlikely to be satisfied if, for example, the company has not provided sufficient notice of the proposed restructuring plan to stakeholders or if a stakeholder raises objections that the court needs to consider further at the subsequent sanction hearing.

In the case of Smile, the judge was satisfied at the convening hearing that the financial evidence, relevant comparator report and evidence from the sales process undertaken as part of the first RP, which was led by experienced professionals, showed that the creditors below the super senior lender were clearly out of the money. On that basis, there would be no benefit gained from requiring those stakeholders to meet and vote on the plan. The judge also said that the one month notice that Smile provided to all parties was adequate and gave parties enough time to decide whether to oppose or contest the application. 

On 10 February 2022, the super senior lender voted and approved the restructuring plan.

At the subsequent sanction hearing, Lord Justice Snowden agreed with the decision made at the convening hearing and approved the restructuring plan. However, Snowden made clear that exercising the power to exclude classes from voting at all on the basis their views are essentially irrelevant is even more draconian than the court’s power to bind dissenting classes.

Snowden’s comments suggest that exercising the power to exclude certain classes of creditors will not be a decision that the court will take lightly and will require that substantive and robust financial evidence is provided in support. 

Guidance on opposing restructuring plans

The court approved the restructuring plan even though a senior lender, Afreximbank, argued in correspondence that the valuation evidence submitted meant that the restructuring plan was unfair. The judge heavily criticised Afreximbank for “shouting from the spectators’ seats”.

If a stakeholder wishes to oppose a plan on valuation grounds, the court said that it should obtain financial information from the company, by making a disclosure application in good time if required, file expert evidence, attend the hearing and assist the court at the appropriate hearing.

The decision in Smile is likely to mean that the courts will be unwilling to re-consider a decision at the convening hearing to exclude certain stakeholders from voting unless the opposing stakeholder engages with the process and formally objects to the plan.

Binding shareholders of a foreign company

Afreximbank also argued that the court did not have jurisdiction to approve a plan that compromised the rights of shareholders of a foreign company. The court, however, decided that Smile did have a sufficient connection to England given its ‘centre of main interests’ was in England and majority of the loan agreements being compromised were governed by English law. The court could therefore justify exercising its discretion to approve the plan that essentially altered the company’s constitution and share capital of an overseas company.

The judge said that it did not matter that a parallel scheme or plan in Mauritius was not available as the English restructuring plan would have effect in Mauritius and the jurisdictions that Smile operated in. The court relied on expert evidence to satisfy itself that an alternative process would successfully allow the plan to be implemented in Mauritius.

This decision is likely to pave the way for continued forum shopping in the UK.