European Directories v (DH6) BV

JUDGE RAYNOR: This is an application by the company, European Directories DH6 BV under paragraph 12 of schedule B1 of the Insolvency Act, 1986 for an administration order under the provisions of paragraphs 10 to 13 of that schedule.

In support, I have been provided with a very full skeleton argument by Mr Simon Mortimor, Queens’s Counsel and Mr Alison of counsel on behalf of the company.

The application is supported by the proposed administrators and again, I have had a full and very helpful skeleton argument by Mr Mark Arnold, counsel for the administrators. It is supported by priority creditors whom I shall mention in more detail shortly, and I have had the benefit of skeleton argument and representation by Mr Marcus Haywood of counsel on behalf of those creditors. It is also supported by the security trustee and counsel, Mr Barry Isaacs, has represented that trustee, who again supports the application. Indeed, the application has the unanimous support of all the first lien lenders whom I shall mention and there has been no opposition to the application before me by anybody.

There were proceedings in the Court of Appeal initiated by second lien lenders. Those proceedings resulted in the position of the security trustee being vindicated and the second lien lenders who had brought those proceedings have, I am told, indicated that they now have no wish to oppose either. The position today is that there is unanimous support by those who have come to court and there is no opposition. Nonetheless, the court ought to carefully scrutinise the evidence that has been adduced in order to ensure that the application is a good one, is not an abuse of the process of the court and that there is no wrongful advantage being taken of the remedies and orders that may be available under the insolvency law of England.

By paragraph 11 of schedule B1, it is provided that the court may make an administration order in respect of the company only if satisfied first, that that company is or is likely to become unable to pay its debts and second, that the administration order is reasonably likely to achieve the purpose of administration.

Paragraph 3 of the schedule defines the purpose of administration as the objective of either rescuing the company as a going concern, or achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration, or realising property in order to make a distribution to one or more secured or preferential creditors.

In this case the purpose that it is submitted is reasonably likely to be achieved is the purpose specified in sub-paragraph b, which is achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up.

The issues before me have been helpfully defined as follows. First, I must be satisfied that the company is a company as defined in paragraph 111(1A)(b) of schedule B(1). Secondly, I must be satisfied that the company has its centre of main interests wholly in England and Wales because that is necessary in order to determine whether the administration constitutes main proceedings within Article 3(1) of the European Regulation. Next I must be satisfied that the company is or is likely to be unable to pay its debts and I must finally be satisfied that an administration order is reasonably likely to achieve the purpose of administration. If I am satisfied of all those matters, it then becomes a matter for the exercise of my discretion as to whether I am satisfied that the just and right order to make on the facts presented to me is an administration order.

The evidence which is before me consists of two witness statements and numerous exhibits. The first witness statement is that of Mr Peter Briggs, a director of the company made on behalf of the applicant company, and the second is that of Mr Peter Spratt, one of the proposed administrators.

I have read those witness statements and they amply confirm as accurate, as one would expect, the statements of fact that are made in the skeleton arguments submitted on behalf of the proposed administrators and the company.

I now state the background to the matter. The company was incorporated in the Netherlands in June 2005 as a private limited company. It is an intermediate holding company in a group of companies formed by Macquarie Capital Alliance in that month to acquire the Yellow Brick Road Directory and search business for about €1.8 billion. The ultimate parent company is European Directories SA which is located in Luxembourg.

The immediate parent of the company with which I am concerned is European Directories DH5.

Although the group as a whole carries on business in various countries offering advertising products through a variety of on-line and off-line media, since 2006 the group administrative headquarters has been at Building 10, Chiswick Park, Chiswick High Road in London, which I shall refer to as the “Chiswick office”.

The company does not trade. Its only assets are shares in its subsidiary, DH7, the parent of the group’s operating companies, and receivables owned by DH7 or its subsidiaries. It has very substantial liabilities. They are first as guarantor of funding obtained for its subsidiary DH7 and that company’s subsidiaries under the various facility agreements secured by transactions security, and unsecured amounts due to its holding company DH5 which it lent to DH7 or its subsidiaries.

The facility agreements are highly complex. They are governed by English law and they have been summarised by Mr Mortimor and Mr Alison in their skeleton argument. Correcting the arithmetical omission in paragraph 5.1, the facility under the senior facilities agreement is €1.52 billion, the borrowers being DH7 and certain subsidiaries; about €1.486 billion remains outstanding thereunder. The company is the guarantor of that facility.

There is a mezzanine facility agreement under which the borrower was DH7 and about €443 million remains outstanding thereunder. The maturity date is July 2015 and the company is the guarantor of DH7’s liabilities under that agreement. DH5 borrowed further finance under a PIK facility but the company is not a guarantor of that.

There is under an intercreditor agreement provision for a security trustee to hold the transactions security for the benefit of secured parties and this agreement determines the parities between the respective lenders. Not surprisingly, the first priority is to the first lien lenders.

In the second quarter of 2009 there was identified the possibility that the company would breach its financial covenants under the senior facilities agreement and a team of advisors comprising solicitors, Rothschilds as financial advisors and Deloittes as tax advisors was engaged. In August 2009 the company engaged PwC London to conduct a financial and promotional review, which was presented in December 2009. It revealed that in 2010 the company would be unable to service its debt obligations in full. It would be unable to pay interest and amortisation on senior debt and mezzanine debt during May and June 2010 and would have a funding requirement of about €400 million by the end of 2012. On 22 December 2009 the senior lenders established a senior coordinating committee, retaining Linklaters as legal advisors and another firm as financial advisors.

It was then appreciated that the company was in breach of financial covenants. The senior and junior lenders were approached for waivers. The senior lenders required the company to appoint a firm to advise on restructuring options and on 1 March 2010 Mr Peter Briggs of that firm, who has provided evidence before me, was appointed a director of the company and chief restructuring officer.

On 1 March 2010 the senior lenders issued a waiver of covenant letter initially expiring on 31 March and later extended to July. The junior lenders also issued a waiver of covenant but no further extensions were obtained from the junior lenders who were, in any event, unable to take any steps in relation to breach of covenant because of restrictions in the intercreditor agreement.

On 27 May the facility agent issued notice to second lien lenders and mezzanine lenders suspending payments to them. Meanwhile, the performance of the operations of the group continued to deteriorate.

In April 2010 the board asked Rothschilds to pursue a third party sales process. Although full steps were taken to market the business, no one was interested in buying it or any part of it. Mr Spratt, one of the proposed administrators, has reviewed the marketing process and considers it was reasonable and appropriate, and following the provision of information by the group and numerous meetings with the company in London, the senior coordinator put forward the proposal which broadly is that sought to be implemented under the restructuring agreement.

That proposal is complex but in essence, as summarised by Mr Spratt, it provides as follows. The company will sell its assets for a nominal sum to a newly incorporated company indirectly owned and controlled by participating priority creditors. This is part of a larger group restructuring by which in essence, a new holding company structure is created to acquire the group’s operating companies to certain of which a new €75 billion term facility will be made available. The overall effect insofar as it affects the company will be that although it will receive a nominal payment for its assets, it will be released from financial obligations amounting to €1.974 billion with a corresponding improvement in its current balance sheet deficit.

I have evidence from the proposed administrators who are satisfied on the basis of valuation evidence that the amount of liabilities from which the company will be released far exceeds the value attributable to its assets and in addition, the company’s accrued liabilities in respect of professional fees will be discharged and arrangements put in place to discharge ongoing professional fees that otherwise would be payable by the company.

The overall effect with regard to the company’s creditors is as follows. The new company will issue new debt instruments to the priority creditors, all of whom have signed the restructuring agreement confirming their support for the restructuring. The company’s liability to the hedging parties will be notated to the subsidiary DH7 which will upon the evidence form part of a new viable group and although other more junior creditors, including the second lien creditors and junior creditors will not receive any return, the evidence before me satisfies me that the value of the company is materially lower than the aggregate total of the priority senior liabilities so that no value is attributable to the liabilities owed to such junior creditors in any event. It is perfectly plain, and I will deal with the figures again in a moment, that on a liquidation no value will be attributable to those liabilities either.

After the restructuring, DH5, the parent of the company with which I am concerned, will be the company’s biggest if not only creditor. It will not receive any repayment in respect of debt owed to it by the company, but it nonetheless supports the restructuring.

In preparation for making an administration application, Deloittes were instructed to prepare a liquidation analysis report dated 4 August 2010, and that indicated that on a liquidation, and there is no evidence before me to suggest this is in any way an unreliable estimate, only a very small amount, about 11 per cent in round terms, will be available for distribution to the parties’ senior lenders and nothing on a liquidation will be available for any other class of creditor.

A valuation was also instructed to be prepared by Rothschilds on a going concern, debt-free and cash-free basis. Its report is dated 17 September 2010 and on that basis the value of the business was indicated as being between €850 million and €1 billion.

By an letter dated 30 November 2010 to which I have been referred, Rothschilds confirmed that if it was to prepare a revised report at that date the valuation would likely be lower, certainly not higher. It is thus clear that on a going concern basis the valuation of the company would be substantially less than the amount that is owed to the priority senior lenders so that there will be nothing in such a sale for any other lender at all.

It is of significance that the second lien lenders and the mezzanine lenders were unable to put forward a plan acceptable to the priority senior lenders.

There is, however, a history of litigation. As I indicated previously, there has been a challenge to the company and security trustee’s construction of the intercreditor agreement by the second lien lenders, who asserted that the security trustee did not have power under the intercreditor agreement to release subsidiaries of the company or charges over their property in order to implement the proposed plan for restructuring.

Proceedings were issued on 7 September on behalf of two of the second lien lenders, and in September almost immediately afterwards, after a hearing, Proudman J found in favour of their construction, namely that the security trustee did not have power to effect the release that was necessary to go forward with the scheme. However, there was an immediate appeal to the Court of Appeal. On 22 October the Court of Appeal allowed the appeals of the company and security trustee, holding that clause 15.2 of the intercreditor agreement had the meaning contended for by the company and trustee so that the trustee was entitled to release the subsidiary companies and security provided by them.

All the senior lenders have entered into a restructuring agreement which binds them to the various steps necessary to implement the proposal. All the priority creditors support that proposal as representing a better result for them than would be achieved on a liquidation or sale, and their view is entitled to substantial weight given that it is clear that there is nothing in either liquidation or sale for any of the junior creditors.

The stark alternative, before I look at the issues, is whether the company should go into insolvent liquidation, or should be allowed through the administration process to achieve the restructuring that I have detailed. There seems to me to be no other alternative available, and if I do not make the administration order then the inevitable result would seem to me to be insolvent liquidation of the company, which would not be in the interests of the only creditors who have an economic interest either in restructuring or on sale as a going concern, or indeed on liquidation.

I now consider the issues which have been raised. The first issue is whether the court has jurisdiction. It is necessary of course for the company to be a company within the meaning of the Insolvency Act. Paragraph 111(1A) of Schedule B to the Act defines “company” as including a company incorporated in an EEA state other than the United Kingdom. The company in this case, as I have stated, was incorporated in an EEA country other than the United Kingdom, namely The Netherlands, and is plainly a company for the purpose of the Insolvency Act.

A more substantial question is whether I am satisfied, as I must be, that the COMI, the centre of main interests of the company, is England. I have been given a very helpful summary of the law and taken to the relevant authorities, and I am satisfied that in their skeleton arguments Mr Mortimor and Mr Alison have summarised the law accurately. The EC regulation does not define COMI, although preamble at recital 13 states that the COMI:

“... should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.”

Article 3.1 of the EC regulation creates a rebuttable presumption that the COMI of a company is the place of its registered office:

“In the case of a company or other legal person, the place of the registered office shall be presumed to be the COMI in the absence of evidence to the contrary .”

For the purpose of determining whether the presumption is rebutted the following general principles are, I am satisfied, to be derived from the authorities:

“(i)

The identification of the COMI depends on the facts of the particular case and involves consideration by the court of all relevant material which it must weigh up and place in the balance. The court must consider the scale of the interest administered at a particular place, and their importance, and then consider the scale and importance of its interests administered at any other place which may be regarded as its COMI.

(ii)

The position of each company within a corporate group must be considered separately because it constitutes a distinct legal entity which is subject to its own jurisdiction.

(iii)

The COMI must be identified by reference to criteria that are both objective and ascertainable by third parties in order to ensure legal certainty and foreseeability concerning the determination of the court with jurisdiction to open main insolvency proceedings. This means that the presumption will be rebutted only if factors, which are both objective and ascertainable by third parties, enable it to be established that an actual situation exists different from that which locating it at the place of its registered office is deemed to reflect.”

(Quote unchecked)

That is a quotation from para 34 of the judgment of the European Court of Justice in Re Eurofood IFSC.

Next, the date by which reference to the location of the COMI must be determined will be the date when the court is required to decide whether to open insolvency proceedings.

It is possible for a company to change its COMI from its original or presumed location. The decision of Lewison J in the case of R v Hallas Telecommunications Luxembourg SCA [2010] ECC 295, was cited to me as a particularly helpful illustration in the context of this case, of a company changing its COMI from one jurisdiction to another. In that case it was said that the COMI was changed from Luxembourg to England, and indeed Lewison J found that such was the case and an administration order was made. At paragraph 4.26 of his judgment Lewison J said the following:

“In the present case it is said that the company’s COMI was changed from Luxembourg to England in the middle of August this year. I have to consider the position as at today’s date. That is to say some three months on. The objective and ascertainable facts on which the company relies in support of its contention that it has shifted its COMI are that its head office and principal operating address is now in London albeit that the premises it occupies are relatively modest and the company is no more than a financing and shareholding vehicle. The company’s creditors were notified of its change of address around that time. Announcement was made by way of a press release that ...(reading to the words)... were shifting to England. It has opened a bank account in London. All payments are made into and out of that bank account, although there remains a bank account in Luxembourg to deal with minor miscellaneous payments. It is registered under the Companies Act in this country although its registered office remains in Luxembourg and it may remain liable to pay tax in Luxembourg too.”

(Quote unchecked)

Paragraph 5:

“The purpose of the COMI is to enable creditors in particular to know where the company is and where it may deal with the company. Therefore it seems to me that one of the most important features of the evidence, which is the feature I mention next, is that all negotiations between the company and its creditors are taking place in London.”

(Quote unchecked)

Lewison J said that on the evidence he was satisfied the company had moved its COMI from Luxembourg to England.

In the present case the evidence before me may be summarised as follows. The company here acts as an intermediate holding company for the other companies within its group. It raises finance then made available to the operating subsidiaries within the group. It does not trade with third parties other than engaging legal and other advisors in connection with restructuring. Its assets mainly consist of intangible assets. It has no employees although of course the overall group has a large number of employees. The directors of the company are Mr Briggs, resident in London, Mr Cook, resident in the United States, and Mr Perisat, also resident in London.

All decisions, I am satisfied, relating to the company’s strategic and financial arrangements, and in particular those concerning its financial dealings and the proposed group restructuring, are made by directors from the Chiswick office. The company and its directors do not operate from any office in The Netherlands in relation to the company’s affairs. It created a restructuring committee with the role of considering the potential restructuring and that meets in London. The vast majority of its creditors are based in England. The principal financing agreements are governed by English law. The senior facilities agreement contains an exclusive jurisdiction clause in favour of England and the mezzanine facility and intercreditor agreements provide that the courts of England are the most appropriate and convenient forum. All of the first lien debt, second lien debt and mezzanine debt are, as I understand it, traded on the London secondary debt market.

Next, and this is of significance in the light of the observations of Lewison J in the Hallas case, since the onset of financial difficulties in the second half of 2009 the centre of discussions between the company’s directors, its professional advisors and principal creditors in relation to the proposed restructuring and reorganisation has been in London. Numerous meetings have taken place between the company and its creditors in London to consider the proposed restructuring. The majority of the advisors to the company and its creditors are based in London and thus, in order to pursue a restructuring it has been determined that the only viable option is for the company to go into administration in England.

On 14 and 21 May the board resolved to take the necessary steps to confirm the location of the company’s COMI in England, and on 20 May 2010 the company wrote to the senior co-ordinating committee to inform them of the steps the company would be undertaking to confirm the location of the COMI in England. Following that resolution a number of practical steps were taken with a view to confirming the COMI in England.

In summary, the company’s business address registered at the Dutch Trade Registry has been designated as the Chiswick office. This address has been designated as the Head Office of the company, and the company does not have a business address in The Netherlands. It has a registered branch in England with the Registrar of Companies at Companies House. On 24 May of this year it wrote to its creditors and counterparties to notify them that the Chiswick address was the new address for correspondence. Its website lists the Chiswick office as the company’s address and states, as is factually accurate now, that the company’s operational headquarters is in London. The company has a bank account in London. The sole signatory to that is the chief financial officer who is based at the Chiswick office. Creditors communicate with the company and its advisors in London.

On that evidence, which seems to me is entirely one way, I am perfectly satisfied that the company has discharged the onus which rests upon it to satisfy me that the rebuttable presumption that the COMI is the place of its registered office has indeed been rebutted. I am perfectly satisfied on the evidence before me that the COMI in the case of this company is England, and that there is thus jurisdiction to make the order which is sought to be made.

The next issue, as I indicated previously, is whether the company is insolvent. That is either cash flow insolvent in that it is, or it is likely to be unable to pay its debts as they fall due, or alternatively that the value of the company’s assets is less than the amount of its liabilities. Those are the definition provisions applied by para 111(1) of schedule B(1) and are taken from Section 123 of the Insolvency Act.

Again, there can be no challenge, and there has been no challenge, to the averments that this company is manifestly insolvent, whether that is viewed as cash flow insolvency or as a balance sheet insolvency.

So far as cash flow insolvency is concerned the company has, since May of this year if not earlier, been unable to pay its debts as they fell due. In that regard, first, the interest which fell due at the end of May and amortisation payments which fell due on 30 June were unable to be paid, and whilst exploring a reconstruction the priority creditors were prepared to forbear until, and only until 17 December 2010, this month in other words. If an administration order is not made the forbearance will lapse and the company will be unable to pay the overdue interest and amortisation payments then due.

Next, on 1 December 2010, the senior lenders accelerated the outstanding liabilities under the senior facilities agreement, as they were entitled to do. Demand was made of the company under its guarantee for approximately €1.18 billion and further amounts in other currencies. The company is quite unable to pay those amounts. As it is unable to pay nearly €50 million due to hedging parties under hedging agreements; the hedging parties agreed to forbear until 17 December 2010. Under the restructuring agreement the debt will be novated.

Finally, the company has been unable to pay all the outstanding professional fees in connection with the proposed restructuring. If the administration order is made they will be paid out of the new €75 million facility I have mentioned.

So far as balance sheet insolvency is concerned, adopting a book value of the company’s assets there is a deficiency of about €1.75 billion against all creditors and a significant deficiency against secured parties. I have said already that the value of the business on a going concern, debt free, cash free basis, will be worth no more, and probably less than €850 million to €1 billion, which is substantially less than the amount owed to the first lien lenders alone, and if the business cannot be sold on a going concern basis the position will be materially worse. Thus the evidence before me is convincing, as attested to by Mr Spratt, that the only creditors with an economic interest in the assets of the company are the priority creditors who, as I have said, are unanimously behind the making of the administration order and the proposed restructuring.

The final legal issue before considering the exercise of discretion is whether the purpose of administration, which I have already defined as achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration, is likely to be achieved. As to the law, there again is no controversy. I must be satisfied that the administration order is “reasonably likely” to achieve the purpose of administration. That requires merely that the court should be satisfied that there is a real prospect that the purpose of administration may be achieved. It is not necessary that the applicant must demonstrate a greater than 50 per cent chance.

The evidence before me establishes to my satisfaction that there is a real prospect, namely that it is reasonably likely that a better result for the company’s creditors as a whole will be achieved if I make the administration order than if the company were to be wound up, and that is because first it is clear that a fully consensual solution is not possible. Secondly, a scheme of arrangement would not result in a better outcome for creditors. Thirdly, the only deal which is available is the proposal which I have detailed, and that has the necessary support of the first lien lenders, necessary because it cannot proceed without that approval.

The only real alternative to administration, as I indicated earlier, is liquidation, and that, as I have said already, will result in all likelihood in a very significant reduction of recoveries for the senior lenders and thus a significantly worse result for the creditors with an economic interest in the company. As previously stated, administration will result in a substantial reduction in the net indebtedness of the company and thus a better position for creditors as a whole. Therefore, again, the evidence it seems to me is one way and establishes that there is the reasonable likelihood of achieving a better result if I make the order.

What then of the exercise of discretion? On the evidence before me, I can see no valid reason why in the exercise of my discretion I should not make the order. On the contrary, not to make the order will in fact achieve a materially worse result for the only creditors with an economic interest in the company. Failing to make this order will result in the certain liquidation of the company. If I make the order, although there are no employees of the company, approximately 5,000 employees of group companies, including 4,800 permanent staff, will have their jobs preserved, and that seems to me a particularly valid reason to make the order.

There is no possible argument for suggesting that this application is an abuse of process and, indeed, I note, and I am fully satisfied, that the practice which was recommended in Re Kayley Vending Limited [2009] BCC 578 and again by Lewison J in the Hallas case has been followed, namely that the evidence before me does provide, so far as possible, the information which is required to be disclosed in the case of Prepack Sales to the company’s creditors in accordance with Statement of Insolvency Practice SIP16 Prepackaged Sales and Administration.

The application has received very considerable consideration by those who have been professionally retained, and I am perfectly satisfied that it is right to make the order.