La Seda De Barcelona SA, Re

MRS JUSTICE PROUDMAN: This is an application by La Seda De Barcelona SA, a company incorporated in Spain, for an order sanctioning a scheme of arrangement pursuant to section 899 of the Companies Act 2006. On 30 April last, Newey J directed the convening of a single meeting of scheme creditors. It was duly convened and took place on 21 May and, as recorded in the chairman’s report, the scheme was approved in accordance with the statutory majorities. The percentage of scheme creditors voting in favour exceeded 95 per cent by value.

The company is a parent company of the La Seda group which includes companies incorporated in Spain, the UK and elsewhere. The group’s business is the manufacture of a substance used in food and beverage packing. The scheme concerns the rights of lenders under a senior facilities agreement which is governed by English law and which is subject to a jurisdiction clause in favour of the courts of England, which provides working capital for the group. There are four facilities, three term loans and a revolving facility. All liabilities rank pari passu.

The company’s obligations under the agreement are secured by charges over shares in several of the subsidiaries. A number of group companies, including Artenius UK Limited, are guarantors.

Partly as a result of the recession, the group’s performance has deteriorated over the past couple of years leading to a severe lack of liquidity and closure of plants. There has been a series of defaults under the agreement. Artenius has gone into administration. The directors believe that without restructuring part or all of the group it will enter into insolvency proceedings in Spain and elsewhere.

Under the proposed restructuring there will be a new equity investment of at least € 150 million for new ordinary shares in the company. Three groups of investors have indicated an intention to invest € 100 million and the company is seeking other equity investors. If successful the new investment will account for € 150 million of the proposed € 300 million increase in the share capital of the company. The scheme proposes that the rights of senior lenders under the agreement will be settled and replaced by a combination of debt and equity pro rata to the interests of the scheme creditors under the agreement, consisting of an allotment of new ordinary shares taking up the remaining € 150 million, an allocation of unsecured debt under an amended facilities agreement, and an allocation of unsecured debt under a new payment in kind loan facility under the amended facilities agreement. If the equity investment does not come through and if certain other conditions are not satisfied by a certain date, the scheme will terminate.

The restructuring and the scheme are designed as a means to rectify the currently unsustainable position in the interests of all who have an interest in the group. The board believes that there is no credible alternative to the scheme which is intended to create a stronger foundation for continuing the company’s business.

The scheme has been explained to me in some detail and I note the aspects to which my attention has been drawn. There are three points with which I need to deal.

First there is the fact that the company is a company established in Spain. At the hearing at which he authorised the scheme meeting Newey J considered the question of jurisdiction under this head. He held that the court had jurisdiction to sanction the scheme. I have seen the submissions made to him which led to that conclusion and I see no reason to revisit it.

Secondly, there is the question of compliance with statutory requirements as to formalities. The scheme meeting was summoned, convened and conducted in accordance with Newey J’s order and the scheme was approved by the requisite majorities in number and value. Newey J approved the constitution of classes and I do not propose reopen that question either.

However, as a result of developments between the provision of documentation and the meeting, certain modifications were made to the scheme and it was appropriate to bring certain further information to the attention of scheme creditors. Negotiations also continued as to the precise drafting of contractual documents required to implement the scheme. Three further notices were circulated referring in particular to the guarantors’ position, to the subordinated debt position to the extension of key dates and drawing attention to changes to the scheme. Those notices were posted on the Intralink website. The company has taken further steps to ensure that the creditors who submitted proxies for the meeting were actually aware of them and of the amendments to the scheme and did not wish to change their vote as a result.

I am satisfied that those voting in favour of the scheme were aware of the relevant matters. The scheme creditors are all sophisticated financial institutions and none sought an adjournment to the scheme meeting or opposes sanction of the scheme today. In my judgment, the amendments do not substantially alter the provisions of the scheme and I believe I would have jurisdiction to sanction it in any event.

The third matter arises out of the fact that the scheme provides for the release by scheme creditors of Artenius’ liabilities under the agreement. The terms of Artenius’s release within and without the scheme have been negotiated up to and including today. For the reasons given by Miss Bryant, it seems to me that the amendments so made are not such as would be considered by scheme creditors to be material to their decision whether or not to approve the scheme.

However, there is a more fundamental underlying point since I have to decide whether the court has jurisdiction to sanction the scheme which includes amongst its terms the release of Artenius although Artenius is not a party to the scheme. Any scheme of arrangement made with creditors must be made with them in their capacity as creditors.

The releases given by the scheme creditors are given in order that Artenius will release its own claims against companies in the group, estimated, potentially at any rate, at over € 80 million. Artenius wants to eliminate doubt as to the jurisdiction as it proposes to make a dividend which is dependent on the validity of the scheme.

I accept Miss Bryant’s submission that the court does have jurisdiction in present circumstances, provided that there is an element of what she describes as give and take. I have been taken to the decision of David Richards J in T&N Limited (No. 3) [2007] 1 BCLC 563. I have also been taken to the decision of the Court of Appeal in Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161 and the reference therein to a number of relevant Australian authorities.

Miss Bryant has analysed those authorities also and has satisfied me that the controversy in Australia has now been laid to rest after the appellate decision by the High Court of Australia on 14 April 2010 in City of Swan v Lehman Brothers Australia Limited [2009] FCAFC 130. It appears that there can now be no doubt about the correctness of the decision in T&N Limited.

Although T&N Limited was distinguished on the facts of Lehman Brothers in the Court of Appeal, it is evident that the Court of Appeal was satisfied that the decision itself was correct because, in the words of Neuberger LJ at paragraph 83, the scheme claimant’s rights:

“(a)

were closely connected with their rights against the company as creditors; (b) were personal, not proprietary, rights; and (c) if exercised and leading to a payment by the insurers, would have resulted in a reduction of the creditors’ claims against the company.”

Patten LJ had said at paragraph 63:

“It seems to me entirely logical to regard the court’s jurisdiction as extending to approving a scheme which varies or releases creditors’ claims against the company on terms which require them to bring into account and release rights of action against third parties designed to recover the same loss. The release of such third party claims is merely ancillary to the arrangement between the company and its own creditors.”

In my judgment, the release in this case does give rise to the requisite element of give and take between the scheme creditors and the company and falls more clearly within the scope of the statute even than the schemes of arrangement in T&N Limited (No. 3). Here the release affects the deal embodied in the settlement agreement whereby (a) Artenius will release the company and its group companies from Artenius’s claims, which might otherwise trigger the insolvency of a company which would have escalated group bankruptcy proceedings; and (b) the scheme creditors, together with Deutsche Bank, release Artenius from its liabilities as guarantor under the agreement.

The release of Artenius benefits the scheme creditors because Artenius’ release of the company and other group companies improves the financial position of the company and the other group companies.

Secondly, Artenius is a guarantor of the liabilities of the company and the group companies under the agreement. The scheme creditors’ rights of action against Artenius are designed to recover the same loss as arises from the scheme creditors’ claims against the company and can fairly be described as ancillary to the arrangement between the company and the scheme creditors.

Thirdly, the scheme claimants’ rights against Artenius by virtue of Artenius’s liability as guarantor (a) are closely connected with the scheme creditors’ rights against the company as creditors; (b) are personal and not proprietary rights; and (c) if exercised and leading to a payment by Artenius would have resulted in a reduction of the scheme creditors’ claims against the company.

I therefore conclude that I do have jurisdiction and I so find.

I have considered Mr Pascoe QC’s submissions as to the merits of the scheme and I am satisfied that it is one that an intelligent and honest man, a member of the class and acting in respect of his interest, might reasonably approve. I propose to approve it in the exercise of my discretion.