Scheme not sanctioned by court due to “paucity of information”

The Judge in the Sunbird scheme of arrangement sanction hearing has declined to sanction the scheme due to the “paucity of information” provided by the company to the creditors ahead of the creditor vote.

The Judge criticised the company’s general approach to the way in which it engaged with creditors, particularly those whom the directors felt would be obstructive to the scheme’s progress. In general terms, the Judge commented on the practice of lock-up agreements and highlighted concerns with the payment of lock-up fees.

Sunbird is a holding company and finance vehicle for a group of companies which historically have provided serviced offices, facilities, management and construction services in Eastern and Southern Africa. In recent times the group has moved more into the serviced offices sector, leaving it with significant old debt connected with the construction arm of its previous business.

The scheme was proposed to reorganise the company’s unsecured debt and raise further funds for the company’s continued survival. These aims were to be achieved through:

• A debt-for-equity swap: unsecured creditors’ debt would be swapped for A1 shares in the company;
• Adoption by the company of some of the debt owed by a subsidiary company which would then be converted to A1 shares;
• A rights issue of more A1 shares to raise further funds; and
• The existing shareholders (including scheme creditors) being entitled to subscribe to a class of A2 shares (which would carry the same voting rights as the A1 shares but would be offered at a lower price) if they subscribed to their full amount of A1 shares in the rights issue.

Critical of the lack of information and poor attitude to creditors

The scheme had been approved at the creditors’ meeting, but at the sanction hearing Mr Justice Snowden found the scheme and the company’s conduct of it severely lacking. The Judge criticised the information provided to the creditors ahead of the vote. In particular, he was concerned with:

• The lack of disclosure of directors’ interests in the scheme (as required by the legislation) which was rectified, but with insufficient time for the creditors to consider it before the meeting was held;
• The lack of detailed financial information as to the state of the group and information as to what the creditors’ position would be in the insolvency alternative; and
• The lack of evidence as to how the valuations of the shares to be offered in the debt-for-equity swap and the rights issue had been arrived at; and the lack of commentary provided to the creditors on what would happen if they did not take up their rights under the rights issue.

He also criticised the company’s general attitude to providing information to creditors and in particular, to those whom the company appeared to consider as insignificant or likely to oppose the scheme. He observed that some creditors had been party to more detailed financial information than was shared with the wider creditor group, but that these extra communications were “not sufficient to overcome the manifest defects in the contents of the formal scheme documents”.

Scheme sanction

The court’s discretion in sanctioning a scheme must be balanced against the view of the majority of scheme creditors who had voted in favour of it. Mr Justice Snowden said, however, that the scheme of arrangement cannot be used to force a compromise upon dissenting creditors unless there has been “scrupulously fair and accurate compliance” with the requirements of the law. Further, a Court would not “rubber stamp” a scheme just because a company’s creditors had voted in favour of it.

“I cannot be satisfied that a reasonable creditor could take an informed decision as to whether the Scheme was in its interests on the basis of the very limited, and in one respect, misleading, material in the Scheme Document and Addendum.”

He declined to sanction the scheme.

Lock-up practices called into question

Of more general interest beyond the facts of this case, were the Judge’s comments on the practice of lock-up agreements. He said, “The widespread use of lock-up agreements in recent years is… not without difficulties.” He was particularly concerned with the payment of lock-up fees, which could, he said, influence creditors to vote for the scheme, when they might otherwise have changed their minds at a later date, feeling, having taken a fee, that they were no longer legally free to alter their position. He alluded to the possibility that such creditors should perhaps be put by the court into a separate class of creditors which would then allow those who had not received a fee a chance to vote the scheme down. Alternatively, he suggested the court may wish to examine closely the reliability of a majority vote comprising creditors in receipt of a lock-up fee and those who have not qualified to receive it.

If the court were to adopt a practice of sectioning lock-up creditors into separate classes from non-lock-up creditors, companies may be tempted to use the new Part 26A Restructuring Plan process instead, which would allow a cram-down of a dissenting class of creditors. However, it would appear that Mr Justice Snowden, who also presided over the recent Virgin Atlantic restructuring plan sanction hearing, is thinking about that too. In the Virgin Atlantic hearing, he made some obiter comments regarding the use of lock-up agreements and the appropriateness of asking lock-up creditors to vote at all in respect of a scheme or Restructuring Plan. Why include in the vote people who are content to approve the plan if not forcibly to bind dissenting creditors? Cross-class cram-down was not in issue in the Virgin Atlantic case, but it would seem Snowden J is ready for it.

Sarah Teal, Hayley Ҫapani and Aaron Luxton of Shoosmiths acted in the matter of Sunbird Business Services Limited for the dissenting creditors who successfully challenged the scheme.