Drax Holdings Ltd., Re

On November 13, 2003 I made orders in these matters under section 425(1) of the Companies Act 1985 that Drax Holdings Ltd ("Drax Holdings") and InPower Ltd ("InPower") convene meetings of scheme creditors to consider and (if thought fit) to approve their respective Schemes of Arrangement ("the Schemes").

The liabilities which are the subject of the Schemes relate to the funding of the acquisition of the Drax Power Station, a coal powered power station in Yorkshire (accounting for 8% of the electricity generated in England and Wales), by the AES Group from National Power plc in 1999. The acquisition of the Power Station was effected by a series of transactions involving a group of subsidiaries ("the Drax Group") of The AES Corporation, a Delaware corporation ("AES").

It is proposed that the Schemes should be approved both in the jurisdictions in which Drax Holdings and InPower are incorporated, respectively the Cayman Islands and Jersey, and in England. Similar applications were therefore made in Jersey and the Cayman Islands, and one meeting will be held for each company in London, on which to base the final hearings on the Schemes in the three jurisdictions.

Drax Holdings was incorporated in the Cayman Islands in 1999 as AES Drax Holdings Ltd, and is a subsidiary of AES. InPower was incorporated in 1999 in Jersey company. Because the companies were foreign companies, I heard submissions on the jurisdiction of the court to summon meetings and sanction schemes under section 425 in relation to foreign companies, and these are the written reasons for my having been satisfied that the court has jurisdiction to do so, which differ from the way in which the matter was originally presented to me on behalf of the companies.

Drax Power Ltd, one of the members of the Drax Group and the owner of the Power Station, entered into a long-term power purchase agreement with TXU Europe Energy Trading Ltd ("EET"), pursuant to which EET pre-purchased the right to call for a substantial proportion of the electricity generated by the Power Station. EET and its guarantor are now in administration and the purchase agreement with EET has been terminated. As a consequence, Drax Holdings, which relied upon distributions made by Drax Power Ltd to service certain of its liabilities, is in default under the terms of its debt instruments. Drax Holdings accepts that, by virtue of putting forward the current proposals, it would be likely to be insolvent if the creditors were not willing to extend the standstill arrangements.

The debts which are the subject of the Schemes amount to some £1 billion in sterling, and about $300 million in US dollars. Drax Holdings issued US dollars bonds, of which some $300 million is outstanding, and sterling bonds, of which £200 million is outstanding, together called "the Senior Bonds".

The principal activity of InPower consists of its participation in the financial arrangements in relation to the acquisition by the Drax Group of the Power Station. InPower subscribed for Eurobonds (maturing in 2015) issued by Drax Holdings in an aggregate face value of £1.725 billion, carrying interest at a fixed rate. InPower assigned to Bondpower Ltd (its subsidiary) its interest in the principal amount of the Eurobonds, but it retains its interest in a series of coupons payable to bearer and located in London ("the Eurobond Coupons") each of which represents interest payable on the Eurobonds falling due prior to the Maturity Date. InPower financed its acquisition of the Eurobonds by borrowing approximately £1.3 billion under a facility agreement in 1999 with a group of banks, which was used to finance the purchase of the Power Station. InPower now owes approximately £843 million to the banks. Because the Drax Group is unable to meet the interest payments due on the Eurobond Coupons, InPower is unable to meet its own obligations to the banks under the Facility Agreement.

In December 2002, Drax Holdings and InPower entered into a standstill agreement with their financial creditors. In late August 2003, an offer to participate from International Power plc ("IPR") was accepted and exclusivity granted with a view to a proposed restructuring on the basis outlined in the Schemes.

The Senior Bonds were issued in August 2000 in global bearer form with the Bank of New York as Trustee and as Custodian. The Global Depository has issued a certificateless depository interest to the Depository Trust Company in respect of the US Dollar Bonds and a certificated depository interest with respect to the Sterling Bonds in accordance with the rules and procedures of Euroclear and Clearstream.

Under this ownership structure the legal creditor of Drax Holdings in respect of the Senior Bonds held in global form is the Global Depository, although holders of beneficial or other proprietary interests may have their names entered into the Register and become holders of Senior Bonds in definitive form. Definitive Holders will, to the extent of their registered holdings, be creditors of Drax Holdings.

In connection with the financing of the acquisition of the Power Station and the issue of the Bonds, Drax Holdings and Drax Power Ltd entered into various arrangements (including hedging arrangements) in relation to currency swaps, and Drax Holdings is now responsible for termination payments due to banks, "the Hedging Termination Payments" due to the "Hedging Banks."

The Eurobonds are constituted by a trust deed dated 30 March 1999 between (among others) Drax Holdings and JP Morgan Chase Bank as the Eurobond Trustee, and the Eurobond Coupons, which are held in London by the Eurobond Trustee in its capacity as depositary, are held under a system under which they are held, in effect, on behalf of InPower. Although they are held on behalf of InPower, the creditor of Drax Holdings in respect of them is the Eurobond Trustee, under covenants contained in the Eurobond Trust Deed and in its capacity as the bearer of the coupons.

The Eurobond is represented by a single global bond in bearer form. Outstanding interest payable in respect of the Eurobond principal sum is represented by a series of coupons in bearer form. The principal sum is repayable in June 2015. For the purposes of the Scheme the relevant value of the Eurobond Coupons has been assessed in order that it should represent a particular value, which is referred to as "Included Eurobond Coupons". The Eurobond and the Eurobond Coupons are both held by J P Morgan Chase Bank.

Various, but not all, of the agreements to which Drax Holdings is a party are governed by English law and the security for liabilities under the Eurobonds and the Senior Bonds includes land situate in England (including the Power Station) and shares in companies registered in England.

The details of the Schemes are extremely complex, and it is not necessary to set them out in detail for the purposes of this judgment. The two Schemes are linked. In relation to Drax Holdings, the Scheme Creditors will be the holders of the US dollar and sterling Senior Bonds; the holders of the Included Eurobond Coupons; and the Hedging Banks. In relation to InPower, they will be the banks to which InPower is indebted under its facility agreement.

In summary (and at the risk of over-simplification), under the Schemes, the Scheme Creditors will be entitled to receive by way of compromise of their claims a mixture of new secured indebtedness of a new Jersey company, InPower 2 Ltd, cash and shares in Drax Group Ltd, which will be the new holding company of the Drax Group and therefore the ultimate owner of the Power Station. The indebtedness due to the Scheme Creditors will be consolidated as indebtedness of InPower 2 Ltd, and the terms of payment, both as to principal and interest, will be rescheduled. If elections are made for cash to the maximum extent, approximately 33.6 per cent of the shares in Drax Group Ltd will be owned by IPR, and the remainder will be owned by the Scheme Creditors.

The Schemes are inter-conditional, and neither will become effective until orders of the English Court and the Jersey Court sanctioning the InPower Scheme and of the English Court and the Grand Court of the Cayman Islands sanctioning the Drax Holdings Scheme have all been delivered to the respective registrars of companies.

By section 425 of the Companies Act 1985

For the purposes of section 425(1) "company" means "any company liable to be wound up under this Act": section 425(6). By section 735A of the Companies Act 1985 the words "this Act" are to be read as including (inter alia) Part V of the Insolvency Act 1986. The provision in the Companies Act 1948 corresponding to section 425(6) was section 206(6), which provided that "company" meant "any company liable to be wound up under this Act."

Among the provisions in Part V (winding up of unregistered companies) of the Insolvency Act 1985 is section 221(1) which provides that "any unregistered company may be wound up under this Act." By section 221(4) voluntary winding up of such companies is excluded. The grounds for the compulsory winding up of unregistered companies are set out in section 221(5), and include cases where the company is unable to pay its debts or if the court is of opinion that it is just and equitable that the company should be wound up: section 221(5)(b) and (c). The effect of section 220 is that the expression "unregistered company" includes any foreign company.

The jurisdictional requirements of what is now section 221(1) have been considered in a line of decisions since 1950: Banque des Marchands de Moscou (Koupetschesky) vKindersley [1951] Ch 112 (C.A.); Re Compania Merabello San Nicholas SA [1973] Ch 75; Re Eloc Electro-Optieck [1982] Ch 43; Re A Company (No. 00359 of 1987) [1988] Ch 210; Re A Company (No. 003102 of 1991), ex p Nyckeln Finance Co Ltd [1991] BCLC 539; Re Real Estate Development Co [1991] BCLC 210; Re Titan International Inc [1998] BCLC 102; Banco Nacional de Cuba v Cosmos Trading [2000] BCC 910 (C.A.); and Stocznia Gdanska SA v Latreefers Inc (No. 2) [2001] 2 BCLC 116 (C.A.).

In the Latreefers Inc case the Court of Appeal confirmed (at 140) that the presence of assets of the company in England was not a pre-condition to the exercise of jurisdiction (although the presence of assets would constitute good reason in the normal case), and that (approving the formulation of Knox J in Re Real Estate Development Co [1991] BCLC 210, 217) before a foreign company could be wound in England, three core requirements had to be fulfilled: (1) there must be a sufficient connection with England which may, but does not necessarily have to, consist of assets within the jurisdiction; (2) there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order; and (3) one or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise a jurisdiction.

It was not necessary in that case (or in the other cases which led to, or followed, the formulation of the three pre-conditions) to decide whether these requirements were pre-conditions for the existence of the statutory jurisdiction of the court, or principles to be observed in considering the discretion to exercise the jurisdiction. The latter approach was favoured (obiter) by Sir Donald Nicholls VC in Re Paramount Airways Ltd (No. 2) [1993] Ch 223, 240.

In most cases the distinction will not matter. The English court will not wind up a foreign company where it has no legitimate interest to do so, for that would be to exercise an exorbitant jurisdiction contrary to international comity, and for that purpose it does not matter whether the pre-conditions are couched in terms of the existence of jurisdiction or the exercise of jurisdiction.

But in the present case it may make a difference, because the question is one of the jurisdiction to approve a scheme of arrangement, and the second and third conditions may not be relevant because they were formulated in the context of winding up. If they go to the jurisdiction to order a winding-up, the words "any company liable to be wound up" in section 425(6) may require those conditions to be fulfilled even in the case of schemes of arrangement. If they go to the discretion to wind up, then they do not have to be fulfilled in the case of a scheme of arrangement, although the first condition would plainly be relevant in any event.

The question therefore is whether (as was assumed in the present matter by the companies) the combined effect of section 425(6) of the 1985 Act and of section 221(1) of the Insolvency Act 1986, and the cases on the winding-up of foreign companies, is that the three conditions must be satisfied before the court can exercise its powers under section 425. In my judgment the three conditions go to the discretion of the court, and not to the existence of its jurisdiction. If that it is right, then the conditions do not have to be satisfied for the purposes of section 425, because they do not go to the question whether a company is "liable" to be wound up under the Insolvency Act 1986. So also it is not necessary for the purposes of section 425 that the grounds for winding up in section 221(5) exist.

Any other result would lead to very odd and artificial consequences, since schemes of arrangement are used in many circumstances having nothing to do with insolvency.

Drax Holdings and InPower are respectively Cayman Islands and Jersey companies, and are therefore unregistered companies which the court has jurisdiction to wind up under the Insolvency Act 1986, and can be the subject of orders under section 425 of the Companies Act 1985. This matter does not therefore raise any complications which may be caused by the provisions of Council Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Article 22(2) of which (like Article 16(2) of the Brussels and Lugano Conventions) assigns exclusive jurisdiction to wind up solvent companies to the courts of the seat, or by Council Regulation 1346/2000 on insolvency proceedings, which limits the power of member states to wind up insolvent companies which have their main interests in other member states.

That the companies fall within the definition of companies for the purpose of section 425 does not, of course, mean that there are no limitations to the exercise of jurisdiction under section 425. The court should not, and will not, exercise its jurisdiction unless a sufficient connection with England is shown. Thus it is almost impossible to envisage circumstances in which the English court could properly exercise jurisdiction in relation to a scheme of arrangement between a foreign company and its members, which would essentially be a matter for the courts of the place of incorporation. A cross-border scheme involving the members of companies incorporated in different countries would be dealt with by separate schemes in the two countries. If it were a reconstruction or amalgamation, then the court could exercise the powers under section 427, but that section does not apply to foreign companies: section 427(6).

In the case of a creditors’ scheme, an important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made, not only by the court in the country of incorporation, but also (as here) by the courts of the country whose law governs the contractual obligations. Otherwise dissentient creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation.

It is not necessary to consider the limits of the permissible exercise of jurisdiction in relation to a creditors’ scheme. But there are many factors here which point to the exercise of the jurisdiction in the present matters being both legitimate and appropriate.

Drax Holdings was incorporated specifically for the purpose of raising finance for the acquisition of the Power Station and continues to be part of those arrangements. The Eurobond Trust Deed (and the Global Eurobond) is governed by English law, and contains a non-exclusive submission to the jurisdiction of the English court. The associated subscription and security documents are governed by English law, and the security includes the Power Station and shares in English companies. Drax Holdings’ Senior Bonds are also secured over the Power Station and shares in English companies, and the debenture is governed by English law.

The principal activity of InPower has, since its incorporation, been its involvement in the arrangements which enabled the Drax Group to acquire the Power Station. Its principal asset is its interest in the Eurobond Coupons, which are assets within the jurisdiction held by JP Morgan Chase Bank in London on InPower’s behalf; and its bank facility agreement is governed by English law and contains a non-exclusive submission to the English jurisdiction. Seven of the creditor banks are incorporated and carry on business in England and of those incorporated elsewhere thirty have branches in England from which they carry on business.

Of fundamental significant in the present case is the fact that simultaneous orders would be made (if the schemes are sanctioned) in the courts of the place of incorporation, Cayman Islands and Jersey. The English Schemes will make those Schemes effective by binding the creditors who are subject to the English jurisdiction. I was also informed (although I was not given details) that Drax Holdings will, for a similar purpose, apply for injunctions under the United States Bankruptcy Law (11 USC section 304) granting relief, in aid of the schemes of arrangement in England, the Cayman Islands and Jersey, with the object of preventing United States creditors from taking action to frustrate the schemes.

If I were wrong in concluding that the second and third conditions approved in the Latreefers case did not have to be satisfied, there is in any event a strong case for saying that they would be satisfied here if Drax Holdings and InPower are, or are likely to become, insolvent. The creditors of both ultimately include financial institutions which are English or have branches in England. If the standstill agreements come to an end without a restructuring having taken place, the likelihood is Drax Holdings will be unable to make the payments due under the Eurobond Coupons and due to others of its creditors, and will be placed in insolvency proceedings, together with other companies in the Drax Group; that there will be liquidations of those companies in addition (in the case of those incorporated abroad) to liquidations in the countries of their incorporation; and that InPower will become insolvent, because it will no longer be able to look to Drax Holdings to finance its liabilities to its creditors.

Consequently I am satisfied that the court has jurisdiction to order the meetings and approve the Schemes because they have a sufficient connection with England.