Smile Telecoms Restructuring Plan: English Court sanctions plan telling dissenting creditors to ‘stop shouting from the spectators’ seats and step up to the plate’
April 06, 2022
On 30 March 2022, the English High Court sanctioned a new restructuring plan for Smile Telecoms Holdings Limited (“Smile” or the “Company”) (the “Restructuring Plan”1). The restructuring will result in the Company’s super senior lender receiving 100 percent of the Company’s equity. Using a Power of Attorney (“PoA”) granted to the Company as part of the Restructuring Plan, the Company will pass special resolutions of its shareholders, amend its constitutional documents and issue new shares in respect of a Mauritian-incorporated entity without any parallel Mauritian proceedings.
Here we consider the key takeaways arising from the Smile Restructuring Plan. You can read our previous OnPoint alert on the convening hearing for the Smile Restructuring Plan here.
Key Takeaways
- Dissenting creditors must ‘stop shouting from the spectators’ seats and step up to the plate’: The decision highlights the need for creditors and members to act quickly and decisively if they intend to mount a credible challenge to any restructuring plan. Where a stakeholder intends to challenge the company’s valuation evidence, such stakeholder should:
- obtain any financial information from the company that may be required, either on a voluntary basis or through a timely (court) disclosure application;
- file its own expert evidence (compliant with CPR 352), instructing the expert to engage in the production of a joint report if possible;
- make such expert available for cross-examination; and
- attend the hearing to address any arguments for the assistance of the court at the appropriate stage.
- First use of section 901C(4) power to exclude out-of-money creditors or members from voting on the plan: Where a company intends to exclude a class of creditors or members from voting on a restructuring plan, given that the deprivation of rights is ‘even more draconian’ than where a cross-class cram down is being imposed on a dissenting class of creditors or members, the Court will need to be ‘entirely satisfied’ that it is appropriate to make an order pursuant to section 901C(4) of the CA 2006 at the convening hearing. Dissenting stakeholders are discouraged (pursuant to Practice Statement in relation to schemes3) from ‘playing a tactical game of keeping their powder dry at the convening stage and only appearing to raise jurisdictional points at the sanction hearing’. In particular, once an order under section 901C(4) has been made at the convening hearing, the court will not, ‘absent some good reason’ revisit this decision, or otherwise give any dissenting party the opportunity to challenge such order at the sanction hearing.
- Concept of ‘compromise or arrangement’ in a restructuring plan: The restructuring plan must, similar to a Part 26 scheme, be a ‘compromise or arrangement’. This is an established principle in scheme jurisprudence which requires some elements of ‘give and take’ which will not be satisfied by a scheme which effects a surrender or expropriation of rights of stakeholders without compensating advantage. The Court did not need to decide whether these principles needed to be applied with some modification, as was argued, where section 901G cross-class cram down power is engaged (for example, on the basis that if stakeholders would receive nothing in the relevant alternative and therefore, have no ‘genuine economic interest’ in a company, their claims may be regarded as worthless and nothing may be provided in exchange for such release or cancellation). Instead, the Court held that in this instance, the nominal ‘ex gratia payments’ could properly be characterised as payments in return for modification or extinction of relevant stakeholders rights without compensating advantage. It raises a question of whether out of money plan creditors will still need to be compensated (even if such payments are de minimis) which may be addressed in future restructuring plan cases.
- Restructuring plan is a flexible tool that can be used to achieve innovative cross-border restructuring solutions: The use of a restructuring plan in this case highlights how the new Part 26A restructuring plan introduced pursuant to the Corporate Insolvency & Governance Act 2020 can be used to achieve innovative cross-border restructuring solutions which aim to preserve a company on a going concern basis. The Smile Restructuring Plan highlights the inherent flexibility of the new restructuring plan and the vast array of options now available to distressed companies to enable them to be rescued on a going concern basis. The fact that the Smile Restructuring Plan achieved a complete disenfranchisement of existing equity and the issue of new equity to the super senior lender in respect of a company incorporated in Mauritius illustrates the global reach and utility of the new restructuring plan. In the particular circumstances of Smile, the fact that the majority shareholder was connected to the super senior lender would undoubtedly have reduced the risk of challenge for the Company in proposing the Restructuring Plan. However, the principles set out and endorsed by the Court in the decision clearly illustrate how similar restructuring solutions can be achieved going forward.
Background
By way of brief background, Smile, together with its subsidiaries (the “Group”), provide internet and telecommunications services in Africa. Smile is a limited company incorporated in Mauritius but with its centre of main interest (or “COMI”) in England.
The Company’s capital structure includes a US$51 million super senior facility provided to it by 966 CO. S.a r.l. (“966”), an entity connected to Smile’s majority shareholder, Al Nahla Technology Co. (“Al Nahla”) (the “Super Senior Facility”).
At the convening hearing, the Company advised the Court that if the proposed Restructuring Plan was not approved, it was anticipated that the Company would go into administration. In these circumstances, it was anticipated that only 966 would receive a dividend in the administration of the Company. The Company’s creditors and shareholders are set out below together with a brief summary as to their anticipated (i) recovery in the relevant alternative, and (ii) return pursuant to the Restructuring Plan:
Broadly speaking, the Restructuring Plan will result in (i) 966 providing an additional US$35.6 million to the Company together with an extension of maturity of the Super Senior Facility, (ii) the existing ordinary and preferred shares will be converted into redeemable deferred shares which can be redeemed for nominal consideration and new shares will be issued to 966 resulting in it owning and controlling 100 percent of the Company’s share capital, (iii) the release of all other liabilities and security subject to the Restructuring Plan (save for the Super Senior Facility and the Senior Facility, which will be transferred to 966), (iv) the allotment of the Restructuring Plan consideration to the creditors and members as outlined above, and (v) the execution of a Disposal Proceeds Sharing Deed pursuant to which the senior lenders have a right to receive future sale proceeds arising for the disposal of assets of the Operating Companies.
Excluding Stakeholders from Voting on the Restructuring Plan: Effective Use of Section 901C(4) of the Companies Act 2006
Given that value breaks in the Super Senior Facility and all other seven classes of creditors and shareholders were out of the money, at the convening hearing, the Company sought permission to utilise the provisions of 901C(4) of the CA 2006 and to propose a one class restructuring plan. A one class plan enabled the Company to avoid the time delays and costs associated with holding meetings for eight classes of creditors and members.
Section 901C(4) of the CA 2006 provides that, on application, a plan company can seek an order of the court to exclude a class from voting if it can satisfy the court that the class of creditors or members have no genuine economic interest in the company.
This test is different to the test applicable to the court’s cross-class cram down power in section 901G(4) of the CA 2006. Section 901G(4) of the CA 2006 allows a dissenting creditor class to be bound by the plan proposal so long as no member of the dissenting class would be any worse off than in the relevant alternative and one class, that is “in the money”, votes in favour of the plan. The test in section 901C(4) of the CA 2006 sets a much higher bar than that in section 901G(4), as it requires that the company demonstrate that the compromised class of creditors has no genuine economic interest in the company, as opposed to no prospect of a better financial outcome under the relevant alternative than under the proposed restructuring plan.
Upon hearing the evidence, the Court gave permission for the Company to propose a one class plan. In the circumstances, Miles J noted that the ‘senior lenders are well out of the money. This does not appear to be a marginal case.’ At the sanction hearing, Snowden LJ further considered utilisation of Section 901C(4) of the CA 2006. Snowden LJ noted that the exclusion of a right to vote was ‘even more draconian’ for stakeholders than where the court was asked to impose a cross-class cram down given that the excluded class would be deprived of the right to vote altogether. The court therefore noted that it is 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.’
Sanction Hearing and Objections of Dissenting Creditor
Following approval of the Restructuring Plan by 966, the Court was asked to sanction the Restructuring Plan.
Prior to and following the convening hearing, Afreximbank had engaged in correspondence with the Company whereby it raised a number of objections to the Restructuring Plan, including on the basis of value and jurisdiction. Ultimately, Afreximbank did not appeal the decision to convene a one class meeting. Further, whilst Afreximbank provided to the Company alternative valuation evidence prepared by Coleago Consulting Limited, which valued the Company between US$424 million and US$644 million, it advised that it did not intend to challenge the Restructuring Plan at the sanction hearing and that it would, ‘…leave matters in relation to the sanction of the Restructuring Plan to the Company’s directors and the court…’.
Snowden LJ considered the Company’s correspondence with Afreximbank and noted that whilst a company proposing a scheme or plan has a ‘duty of utmost candour to bring all relevant matters to the attention of the court, including arguments that might properly be advanced against the sanction of the scheme or plan…that important obligation does not, in my view, extend to an obligation on the company to advance full argument against itself of a case based upon an expert report which it did not commission, with which it and its professional advisers do not agree, and in relation to which it has filed evidence from its own experts explaining why the rival report is wrong.’ Snowden LJ further commented that where objections have been raised but the relevant stakeholder does not participate in the proceedings to pursue such objections, in these circumstances, the court cannot be expected to ‘engage in some sort of vicarious challenge’ without the benefit of experts and the benefit of cross-examination. Where a creditor or member ‘…wishes to oppose a scheme or plan based on a contention that the company’s valuation evidence as to the outcome for creditors or members in the relevant alternative is wrong, they must stop shouting from the spectators’ seats and step up to the plate.’ It is therefore clear that if any creditor or member wishes to challenge a restructuring plan on the basis of value, any such stakeholder will need to move quickly in obtaining its own valuation evidence which must be subject to cross-examination in court. Further, where a creditor or member intends to challenge any application pursuant to section 901C(4) of the CA 2006, that challenge must be made at the convening hearing as the court will not be expected to re-evaluate any decision to exclude any class of creditor or members from voting on a restructuring plan at the sanction hearing.
International Recognition
At sanction, even where a scheme or restructuring plan has been approved by the requisite majority of voting creditors, the court retains a discretion as to whether to sanction the relevant scheme or restructuring plan. In exercising its discretion, the court must consider whether the Restructuring Plan contains any ‘blots’ or defects such that it is not appropriate for the English court to sanction the plan. In particular, in the case of Smile, the court had to consider (i) if the Company had a sufficient connection to the UK such that it was appropriate for the English court to sanction the Restructuring Plan, (ii) whether it was appropriate for the English court to sanction a Restructuring Plan that would lead to the alteration of the constitution and share capital of a company incorporated in Mauritius, (iii) whether the Restructuring Plan would achieve these amendments, and (iv) whether the contractual compromises proposed by the Restructuring Plan would be recognised in overseas jurisdictions such that the court will not be acting in vain if the Restructuring Plan is sanctioned.
On the question of ‘sufficient connection’, whilst the Company is incorporated in Mauritius, the Court was satisfied that the Company had a sufficient connection to the UK on the basis that its COMI was in England and the overwhelming majority of debts to be compromised under the Restructuring Plan are governed by English law.
As to whether the English court could sanction a scheme or plan which involved altering the constitution and share capital of an overseas company, Snowden LJ said that it was ‘tolerably clear’ that the English court could sanction any such scheme or plan. However, in relation to solvent schemes, the position would be different.
The necessary amendments to the constitution of the Company and the issue of new shares were to be achieved using a PoA granted to the Company pursuant to the terms of the Restructuring Plan. The PoA would be used by the Company to pass special resolutions in accordance with Mauritian companies law. The court did not accept the Company’s submission that by virtue of the English court sanctioning the plan this would have direct effect to alter the Company’s constitution and share capital as a matter of Mauritian law. However, the court was satisfied, on the basis of expert evidence provided by Mauritian local counsel, that the PoA could be used and would be effective in Mauritius to achieve the proposed changes to the constitution of the Company, its share capital and shareholdings as contemplated by the Restructuring Plan.
With regard to international recognition of the Restructuring Plan more generally, the court was satisfied, on the basis of expert evidence provided to the court, that the Restructuring Plan was capable of being recognised in Mauritius, Nigeria and South Africa. Accordingly, whilst the Company did not intend to seek local recognition of the Restructuring Plan or to otherwise open parallel local proceedings, the court was satisfied that if any dissenting creditors or members sought to challenge the Restructuring Plan in the above jurisdictions, given the likelihood of recognition being provided in such jurisdictions, it was unlikely that sanction of the Restructuring Plan would be made in vain.
Footnotes
1) Re Smile Telecoms Holdings Limited [2022] EWHC 740 (Ch), accessible here.
2) The Civil Procedure Rules 1998, Part 35 Experts and Assessors, accessible here.
3) Practice Statement (Companies Scheme of Arrangement under Part 26 and Part 26A of the Companies Act 2006), accessible here.
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