DX Holdings Ltd & Ors

These are applications by DX Holdings Limited and DX Secure Mail Limited (together “the Scheme Companies”) for orders convening meetings of creditors to consider and if thought fit approve a Scheme of Arrangement pursuant to section 896 of the Companies Act 2006.

The application for these orders was made at a hearing on June 18th 2010 at which the Scheme Companies were represented by Mr Trower QC and Mr Goldring and the Co-ordinators' Committee representing consenting lenders was represented by Mr Arnold. There was no appearance from any dissentient lenders. I made an order giving directions for the convening of meetings in respect of each of three classes of creditors in relation to each of the two Scheme Companies. I did so after hearing argument on behalf of the Scheme Companies on the question of whether it was necessary further to sub-divide any of the classes of creditors in order to account for the fact that certain of the creditors are party to a Lock Up Agreement, pursuant to which, in return for their agreement to vote in favour of the Scheme at the meeting they will receive benefits in the form of fees. I elected to put my reasons for making that order in writing. These are those reasons.

The three classes of creditors within each Scheme Company are called Senior, Second Lien and Mezzanine Creditors respectively. A majority in excess of 75% by value of Senior Creditors and all Mezzanine and Second Lien Creditors have been bound in by the Lock Up Agreement to support the Scheme. Two creditors of the Scheme Companies have not signed the Lock Up Agreement. Although, as the evidence shows, they were eligible to sign the Lock Up Agreement, they have elected not to do so. It is no longer open to them to sign the Lock Up Agreement or claim the fees, even if they vote in favour of the Scheme, because the deadline imposed for becoming a party to the Lock Up Agreement has passed.

The question therefore arises as to whether those who have signed the Lock Up Agreement form a separate class. On the face of it the Scheme will treat those who are parties to the Lock Up Agreement differently from those who are not, in that they will receive fees.

The test for whether a class of creditors forms a separate class depends on whether their rights are so dissimilar as to make it impossible for them to consult together with a view to their common interest: see Sovereign Life Assurance v Dodd [1892] 2 QB 573 at 583. Thus it is not every difference in the rights of the members of a class which would mandate the creation of a separate class. That there can be differences is acknowledged in the way the test is stated. A difference is only sufficient to mandate the creation of a separate class if it is sufficiently great to make consultation with a view to their common interest impossible. That is a value judgment which involves, amongst other things, the materiality of the difference in rights in comparison with the common rights under discussion.

The mere fact that the agreement of creditors to a Scheme has been secured in advance of a meeting by means of a voting agreement is plainly not sufficient to create a separate class. As David Richards J held in Re Telewest Communications PLC [2004] BCC 356; [2004] EWHC 924 (Ch) at [52] – [53], there is much sense in securing this agreement in advance of the expenditure of time and money involved in pursuing a scheme. In that case it was argued that a voting agreement prevented the views of the creditors being the views of the class, but David Richards J held that argument to have no substance, at least where the bondholder would not have voted differently in the absence of the agreement. However at [54] he said this:

“A serious issue would arise if in consideration of its agreement to vote in favour of the scheme, or collaterally to it, the bondholder received benefits not available to the other bondholders. In effect, the result would be unequal treatment under the scheme and the bondholder could not, I think, be included in the class. As I was informed, that is not the case with the voting agreement in this case. The voting obligations are conditional on prior payment of fees and costs incurred by the bondholder committee in the course of the past two years but Telewest had already, independently of the voting agreements, undertaken to pay these costs and fees. Telewest will also pay their costs of entering into the voting agreements and I consider that to be immaterial.”

In the present case I was not satisfied that the existence of the benefits meant that those who had accepted them formed a separate class. Firstly, there is no doubt that the benefits were available to all creditors if they entered into the Agreement: they were all made aware of the offer in March 2010. Secondly, the evidence shows it to be most unlikely that a creditor who considered any substantive aspect of the Scheme to be against its interests would be persuaded to vote in favour of it by the existence of the fees. That is not only the view of Mr Pain, a director of the Scheme Companies, but is supported by a witness statement made by the solicitor acting on behalf of the consenting creditors. The view he expresses is that his clients are in favour of the Scheme because the alternative of insolvent administration would result in their suffering very significant losses compared to the proposed rights under the Scheme. Alongside that, he says, the fees are not a material factor. He says that a deadline for signing up, coupled with a small incentive, gives focus to negotiations which could otherwise be protracted. Thirdly, the amount of the fees is small in relation to common interests of the creditors in relation to the restructuring. The fee which is payable immediately is 0.5% of the outstanding loan. A further fee of 2% is of less weight as it is payable much further in the future and is conditional upon certain loan extensions occurring.

Class questions such as these are highly fact specific. As Mr Trower readily acknowledged, payments of this kind are quite plainly capable, depending on the circumstances, of manufacturing a new class of creditors. But I was, in the end, sufficiently satisfied by Mr Trower's arguments that it was proper in this particular case to allow the Scheme to go forward to the sanction stage without provision for new classes.

It is worth recording, finally, that the two dissentient creditors had ample opportunity to come before the Court to contend that the arrangements described in this judgment gave rise to a class issue. The Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345 makes it clear that creditors who raise class issues at the sanction hearing will have to explain why they were not raised earlier. Quite apart from that, in the present case a letter was communicated to all creditors expressly flagging up the precise issue which I have dealt with and indicating that objections to the classes should be raised at the hearing on June 18th. No dissenting creditors appeared. Whilst their default of appearance cannot confer jurisdiction where none existed before, it would be regrettable if they asked the Court to make a different value judgment at the sanction hearing when they have chosen not to attend or file evidence at this stage.