Primacom Holding GmbH & Anor v A Group of the Senior Lenders & Credit Agricole

MR JUSTICE HILDYARD: This is an application seeking an order convening four meetings of scheme creditors of a company called PrimaCom Holdings GmbH to consider and, if sought, approve a scheme of arrangement proposed by the company pursuant to part 26 of the Companies Act 2006.

As the name of the company indicates, it is a German-incorporated company and one of the matters which I will need to consider is whether the English court has jurisdiction to deal with a creditor scheme in such a context and, if so, what are the guidelines which should be borne in mind.

The scheme creditors are all creditors under financing arrangements entered into by the company. The application is supported by a witness statement of the managing director and chief restructuring officer of the company namely, Mr. Wolf Waschkuhn. The scheme that is proposed is part of a more general restructuring of the group of companies of which this company forms a part. Put very shortly, this company is an immediate holding company of another corporation called Medfort S.a.r.L. (“Medfort”), which is incorporated in Luxembourg, which is, in turn, the immediate 100 per cent-held subsidiary of Perseus Holdings SA (“Perseus”), also incorporated in Luxembourg.

I can take the following description of the proposed restructuring from the Applicant’s skeleton argument:

“The key feature of the Proposed Restructuring (including the Scheme) are set out in the Explanatory Statement [2/C/378-380; 2/C/382-298] and at Waschkuhn, paragraph 54. In summary:

(1)

The Company (on behalf of the Scheme Creditors) will execute and deliver the Security Agent Instruction Letter, the Senior Agent Instruction Letter and the Mezzanine Agent Instruction Letter by which the Scheme Creditors will irrevocably instruct the Agents under the finance documents to execute all relevant Restructuring Documents;

(2)

A €20,000,000 bridge facility loan (‘the Bridge Facility’) will be advanced to the company to bridge the period from the effective date of the Scheme until the New Senior Facility A (as described below) is drawn. In summary:

(a)

It is envisaged that the Bridge Facility will be available until on or before 31 March 2012 when the New Senior Facility A will be drawn and the Bridge Facility repaid.

(b)

The Bridge Facility will have the same ranking as the New Senior Facility A (i.e. super senior and pari passu with the claims of the Super Senior Hedging Scheme Creditors).

(c)

The Bridge Facility will be available to all Senior Scheme Creditors pro rata to their commitments under the Senior Facilities Agreement. The Senior Scheme Creditors will have until 5:30pm in 11 January 2012 to elect to participate in the Bridge Facility. If all the Senior Scheme Creditors do not agree to fund their pro rata share of the Bridge Facility, the balance will be available to those Senior Scheme Creditors who wish to participate in the Bridge Facility to fund. Following this, if there is still any part of the Bridge Facility that remains unfunded, the Investor Scheme Creditors will commit to funding it. This gives the Company certainty that the Bridge Facility will be taken up in full by the Senior Scheme Creditors.

(d)

It is envisaged that the Bridge Facility will be available until on or before 31 March 2012 when the New Senior Facility A will be drawn and the Bridge Facility repaid.

(3)

The Company will execute the Senior Facilities Amendment Agreement on behalf of the Super Senior Hedging Scheme Creditors and the Senior Scheme Creditors. The Senior Facilities Amendment Agreement will contain the following key amendments to the Senior Facilities Agreement:

(a)

A New Senior Facility A term loan will be advanced to PrimaCom Holding in the amount of €20,000,000 with a backstop maturity date of 30 September 2015. The lenders under the Bridge Facility have the option to participate in the New Senior Facility A pro rata to their participation under the Bridge Facility. If the lenders under the Bridge Facility do not all agree to fund their pro rata share of the New Senior Facility A, the lenders under the Bridge Facility that choose to participate may fund the full remaining amount of the New Senior Facility A. Following this, if there is still any part of the New Senior Facility A that remains unfunded, the Investor Scheme Creditors will commit to funding such part. This gives the Company certainty that the New Senior Facility A will be taken up in full by the Senior Scheme Creditors.

(b)

The outstanding amounts under each of the facilities which together make under the Senior Facilities Agreement will be combined into a New Senior Facility B loan with a repayment dated of 31 March 2017.

(c)

A new uncommitted Accordion Facility of €40,000,000 will be created and it will rank pari passu with the New Senior Facility B and have a maturity date of 31 March 2017.

(4)

The Company will execute the Mezzanine Facility Amendment Agreement on behalf of the Mezzanine Scheme Creditors pursuant to which the claims of the Mezzanine Scheme Creditors will be pushed up to Medfort. This will result in the Company’s total debt burden decreasing by €36,730,447.

(5)

The Company will execute the Mezzanine Deed of Variation on behalf of the Existing Mezzanine Scheme Creditors. The Mezzanine Deed of Variation will confirm that the claims of the Existing Mezzanine Scheme Creditors shall continue to be regulated on the same terms as the Mezzanine Facility Agreement notwithstanding the push up of the claims of the Mezzanine Scheme Creditors to Medfort.

(6)

The Second Lien Creditors will execute the Second Lien Agent Instruction Letter and deliver it to the Second Lien Agent to irrevocably instruct it to execute the Second Lien Restructuring Document including the Second Lien Facility Amendment Agreement pursuant to which the claims of the Second Lien Creditor will be pushed up to Medfort in the event that no change of control occurs by 1 December 2012. This would result in the Company’s total debt burden decreasing by €32,794,923.59.

(7)

The Intercreditor Agreement will be amended (with the Company acting on behalf of the Scheme Creditors) so that the claims rank as follows:

(a)

The Super Senior Hedging Liabilities and the liabilities under the Bridge Facility or the liabilities under the New Senior Facility A, as appropriate;

(b)

The liabilities under the Senior Facilities Agreement;

(c)

The liabilities under the Second Lien Facility Agreement; and

(d)

The liabilities under the Existing Mezzanine Facility Agreement.

(8)

Medfort and the Company will execute the Mezzanine Deed of Assumption and, at least one business day afterwards (for German tax reasons), the Mezzanine Deed of Consent pursuant to which Medfort will assume the Company’s obligations for the claims of the Mezzanine Scheme Creditors.

It is a pre-condition to the Scheme becoming effective that the above steps have been completed in the appropriate sequence. These pre-conditions are appropriate and unobjectionable.”

The context or immediate background in which the scheme is put forward is that the group of which the company is part, and which is a provider of basic and digital cable television high speed Internet and telephony products in Germany serving approximately 1 million households in Germany, has experienced a decline in its financial performance through 2011 when compared to its original business plan.

Its immediate preoccupation is that on 31 December 2011 and then on 25 January 2012 two interest payments are due. It is the view of the directors of the company, who are separately advised as to their duties under German law to the company, that if the proposed restructuring, including this scheme, is not completed by 25 January 2012 and no further forbearance is granted, that they will likely be required to place the company into an insolvency proceeding in Germany.

In that context, and as I will further explain, in the hearing I was furnished with a further witness statement from the same managing director and chief restructuring officer which injected an even greater sense of urgency into the matter, indicating that, unless by the end of this term this court had convened scheme meetings in respect of the company, the directors, on advice, would see no alternative but to place the company into such an insolvency proceeding in Germany.

It is, as I understand it, not disputed at present that an insolvency process in Germany would be likely to lead to very substantially less recoveries on behalf of the broad constituencies of creditors than could be available if a scheme is successfully promulgated under the provisions of the English statute.

In short, it is put forward by the promulgators of the scheme in the shape of the company that the restructuring generally, and including this scheme, represents the only credible alternative to a formal insolvency proceeding which would result in significant lower recoveries for all the scheme creditors than could be available under a successful scheme here and the proposed restructuring of the group.

Dealing first with the background concerning the group, I should mention that the company was formerly a wholly-owned subsidiary of PrimaCom AG, a listed German Company. However, on 16 June 2010, formal insolvency proceedings were initiated over the assets of that company and an insolvency administrator was appointed. On 5 July, Medfort (which I have already mentioned) acquired the shares in the company from the insolvency administrator and it is in that way that the company has become a wholly-owned subsidiary of Medfort. I should also mention that the group as whole was subject to a restructuring in January 2011, pursuant to which two things happened: first, Medfort agreed to assume around €100 million of mezzanine debt formerly owned by the company, and the ultimate holding company, Perseus, acquired the entire share capital of Medfort.

The categories of creditors who are scheme creditors for the purposes of the scheme proposed, can be described as follows: first in priority are the Super Senior Hedging Scheme Creditors who are owed approximately €6,736,743, all of which is outstanding, the two super Senior Hedging Scheme Creditors are Credit Agricole Corporate, an investment bank, and secondly, ING Bank NV.

Credit Agricole, as I will try and call it, appears today through Mr Adam Goodison of counsel. He has pressed me, as I shall later describe, to adjourn these proceedings in order for Credit Agricole to seek to persuade the company towards a more workable scheme with the threat that, under the existing arrangements, Credit Agricole would not feel able to support the scheme and could therefore block it. As I say, I shall return to that in due course.

The second tier of creditors are called the Senior Scheme Creditors, under a Senior Facilities Agreement dated 6 January 2011. The amount outstanding to that tier of creditors is €208,198,678 which is split between various facilities which I need not, I think, detail for present purposes.

There is a third tier in the shape of lenders, who I shall refer to as the Second Lien Creditors, under a Second Lien Facility agreement dated 6 January 2011, to whom there is outstanding from the company approximately €32,800,000.

Fourthly, there are the Mezzanine Creditors under a Mezzanine Facility Agreement dated 21 November 2011, as amended and subsequently restated.

There is a fifth group, also under a mezzanine facility agreement, this time dated 6 January 2011.

These five groups are proposed to be dealt with in four class meetings. I shall come to explain how those classes are to be comprised and constituted, but note immediately, so as to clear them out of the way, that the Second Lien Creditors are not, for this purpose, to be convened at a meeting since all of them have unanimously agreed the proposed scheme.

It is an important feature, particularly in the context of whether the English court has jurisdiction which it should exercise, that all the financing arrangements which I have described are governed by English law. In addition, there is an Inter-Creditor Agreement governing the relative rights of the creditors under each of the financing arrangement facilities, which is dated 6 January 2011. It is a further important factor that that inter-creditor agreement is governed also by English law. The order of priorities which is set out in the Inter-Creditor Agreement is (and this reflects my previous description) first, Super Senior Hedging Scheme Creditors, second, Senior Scheme Creditors, third, Second Lien Creditors, fourth, the Mezzanine Scheme Creditors and the existing Mezzanine Scheme Creditors.

Pausing there, and by way of foreshadowing the class constitution proposed, the Mezzanine Scheme Creditors can be divided for these purposes into two groups: one, an amount which is to be translated or transported up the chain in terms of the indebtedness so that the indebtedness becomes indebtedness of the immediate holding company, Medfort, and another group or amount which is to stay put and remain as indebtedness of the company.

Medfort, the immediate holding company, has gross debts of approximately €143,862,421 under the Medfort Facilities Agreement. This is made up of another number of facilities. The important point to note in this context, however (and that which releases me from a further detailed description) is that the Medfort Facilities Agreement is borrowed solely by Medfort and no guarantees or security had been given by the company or any of its direct or indirect subsidiaries. Therefore, whilst the state of indebtedness of Medfort may be a relevant factor when the matter ultimately comes before the court on a fairness hearing, as I shall describe, it is not a matter which will affect the constitution of classes with which I am presently concerned.

I should also mention, before describing the need and objectives of the scheme, that there also appeared before me Mr Richard Tett of Freshfields appearing for a group of investors whose identities or names are set out in a Practice Statement letter dated 9 December, and they are described in paragraph 4.1 of that letter as follows:

“4.1

PrimaCom Holding is part of the Group whose immediate parent is Medfort. The Group is beneficially owned by Alcentra Global Special Situations (Luxembourg) S.ar.1., GL Europe Luxembourg S.a r.1., ING Bank N.V., Shiofra 1 S.a.r.1., Shiofra 2 S.a.r.l. and Tennenbaum Opportunities Partners V. LP (the "Existing Investors").

4.2

The Group is a provider of basic and digital cable television, high-speed interne and telephony products in Germany. The Group deals with both local signal distribution and cable installation. These activities cover both 'Network Level 3' and 'Network Level 4' within the German cable sector classification (which is divided according to the function the cable network has in the delivery of cable services to subscribers). The Group services approximately 1 million households and mainly operates its networks in the following east German regions: Berlin, Brandenburg, Saxony, Saxony-Anhalt, Thuringia and Mecklenburg-Western Pomerania. The Group also has a presence in a number of west German regions.

4.3

PrimaCom Holding (at the time named PrimaCom Management GmbH) was originally a wholly-owned corporate subsidiary of PrimaCom AG, a listed German company. On 16 June 2010, formal insolvency proceedings were opened over the assets of PrimaCom AG and an insolvency administrator was appointed. Following this, Medfort entered into a sale and purchase agreement with PrimaCom AG's insolvency administrator on 5 July 2010 pursuant to which it agreed to acquire the shares in PrimaCom Holding. As part of the acquisition and to prevent claims from Omega I S.a r.l. (the former parent company of the PrimaCom group) into the restructured group (post acquisition), Medfort acquired a shareholder loan (of approximately €21 million) originally granted by Omega I S.a r.l. to PrimaCom Holding (the "Omega Loan"). The benefit of the Omega Loan was later assigned by Medfort to its immediate parent company, Perseus Holding S.A.

4.4

The consideration paid by Medfort for the shares (totalling approximately €10 million) was financed by loans granted to Medfort by FirmenCredit Bank (the "Bidco Facility").

4.5

As part of a later restructuring, Medfort assumed the borrowing obligations of PrimaCom Holding under both the Omega Loan and under Facility A of the Mezzanine Facility Agreement (totalling approximately €100 million) in order to strengthen the balance sheet of PrimaCom Holding.

4.6

Facility A of the Mezzanine Facility Agreement, the Omega Loan and the Bidco Facility were later combined to form separate tranches within a single facility agreement (the "Medfort Facilities Agreement"). The Bidco Facility became Facility A, the old Facility A of the Mezzanine Facility Agreement became Facility B and the Omega Loan became Facility C respectively of the Medfort Facilities Agreement.”

The pressing need for the scheme, in addition to the imminent requirement to pay interest amounts (as I have described) in December and January, is that the group is in urgent need of liquidity, both to enable it to make network upgrades but also in order to ensure that it can meet the forthcoming two and subsequent interest payments due under the facilities as and when they fall due.

At present, the company has the benefit of a deferral of the immediate interest payments due on 31 December 2011 and 25 January 2012 pursuant to a lockup agreement entered into by certain scheme creditors. The company accepts that it would not be able to meet the interest payments on the due dates and is saved by that arrangement.

The purpose of the proposed restructuring, including the scheme is, firstly, to deliver the required liquidity to the group and the company and, secondly, to significantly reduce the company’s ongoing debt burden.

In that context and by way of further explanation, under the terms of the scheme (and as I have already indicated) part of the indebtedness of the company will be transferred up the chain and will be taken off the balance sheet of the company itself.

The desire to achieve these understandable objectives is urgent in itself but that urgency has, as I have previously foreshadowed, been considerably further emphasised by a second witness statement (to which I have also referred) in which Mr Waschkuhn says this: first, that under German insolvency law when a company becomes, as he puts it, “over-indebted”, that is to say balance-sheet insolvent or illiquid, or in other words unable to pay its debts as they fall due, the directors of the company must, under German law, file for insolvency without delay and in any event within a maximum of 21 days (which is called the filing period) or else they will face personal liability including potential civil/criminal liability.

When I asked for more details in that regard, which was the background to the provision of this second witness statement, it was emphasised to me that the filing period would, in the view of the directors on advice, commence almost immediately; that is to say, at the end of tomorrow, if no scheme meetings were held. Paragraph 9 of that second witness statement states that management of the company believes (and has received legal advice) that if a consensual agreement between the scheme creditors is not achieved prior to 5.30pm on 23 December 2011 then, absent an order prior to the end of the court term convening the scheme meetings, it would have no alternative but to file for insolvency in Germany, with the disadvantageous consequences as I understand them to be.

In these difficult circumstances, nevertheless, on behalf of his client’s, Credit Agricole as Super Senior Hedging Scheme Creditors, and some 37 per cent of what were described as the Senior Only Lenders, who are second in the waterfall of credit, Mr Goodison applied for an adjournment. The basis of his application, in a nutshell, was that his clients had only become aware very lately of the fact of this hearing and had only been provided with detailed documentation in the form of the scheme itself and its accompanying explanatory memorandum, during the afternoon of 19 December 2011. Secondly, and more substantively perhaps, Mr Goodison submitted that this scheme was a scheme which Credit Agricole and his other clients could not support and that given the numerical value of their claims (and in particular Credit Agricole’s ability to block any vote of a class comprised of the Super Senior Hedging Creditors) it was doomed to failure. He urged, therefore, that the court should adjourn, pending the settlement of, or at least allow there to be generated, a revised scheme which could encourage the support necessary to ensure its success at the class meeting stage.

It was politely but vigorously pressed on me that it would be a waste of time for the court to allow this scheme to proceed in light of the numerical position within the various classes and, worse than that, it would, in the event, waste further time because it would allow oxygen to a scheme and the wastage of effort over the course of the next month or so which could more usefully be directed towards the generation of an altogether more acceptable scheme.

Mr Goodison, taking into account the further witness statement that had been provided, nevertheless queried whether the urgency as portrayed or depicted by the directors, albeit on advice, was really as pressing as presented. He queried whether a more energetic programme of senior meetings and a more aggressive timetable generally might not be an alternative answer; and, in any event, he queried (which was as far as he could since his clients are not, as I understand it, privy to the board’s conversation) whether the position is really as urgent as had been indicated. He made clear that an adjournment of some 24 hours would meet no useful purpose, but he did press for an adjournment sufficient to allow what he would regard as sense to prevail.

On the other hand, the company, also supported by the Investors represented by Mr Tett, for the reasons I have indicated, strenuously opposed any adjournment.

In the event, I considered and held that no adjournment should be granted. I have a lingering disquiet that I have become involved in what is inevitably a somewhat unsatisfactory position of differing creditors jockeying for position, and intent on securing maximum advantage. I say that not out of any particular evidence, but out of a general feeling which, I suppose, is inevitable when, to some extent, both sides are putting the gun to each other’s head.

In the event, my conclusion has been that, amongst a choice of invidious choices, the least bad option is to ensure that the chance of a scheme in the end is preserved, whether it be this scheme or another kind of scheme, and that an adjournment would preclude that choice ever being available.

On the question of modification, I was pressed (by Mr Allison of counsel on behalf of the company) to the view that the provision for modification within the scheme would be sufficiently broad to accommodate changes to the scheme in the event that Mr Goodison’s clients persuaded others in the course of discussions, which I was informed were ongoing, towards a substantial change in the scheme which could then command their support.

It is difficult from this position to be able to determine with certainty and, in the absence of a very extended review of authorities, how broad a modification power would be permitted. It was accepted on all sides that at least three boundaries to the modification power could be discerned: first the court would be anxious to ensure that the scheme was not so different from the scheme which was before the scheme creditors at the class meetings that their votes would really not be on that scheme at all. Second, the court would be against modification if it would alter the class compositions; and, thirdly, the court would be against modification if, thereby, the explanatory statement would be falsified or proven irrelevant.

As it seems to me, it will be a matter for Credit Agricole and Mr Goodison’s other clients to determine whether the modification power, if they are otherwise able to persuade the company to adopt a modification, is sufficiently broad or whether a parallel scheme would have to be promoted, but I leave that to the parties (who are much more conversant with the details of the matter than I) to determine that.

The long and the short of it is, as I have said, that I refused the request for an adjournment, albeit with some feeling of anxiety as to what competition I was then encouraging.

Turning to the substance of the matters before me, I must remind myself, first, the stage at which we are dealing with the matter. We are dealing with the matter only for the purposes of determining (and even this is on a basis which can subsequently be departed from) the proper composition of classes and for the purposes of determining what should be the rules which govern any such meetings. We are, in other words, at the stage which was enabled (after very many years of a different practice) by the decision in Re Hawk Insurance Co Limited [2001] 2 BCLC 675.

It follows from that recognition of the early stage that I am not presently concerned with issues of fairness. Issues of fairness will have to be determined, assuming that the scheme proceeds and passes the quite redoubtable hurdles, as they seem to me to be, of the class meetings, by the court at the fairness hearing stage.

The identification of the proper classes is a different process and involves, not assessing fairness but assessing whether the relevant classes as chosen are apt, given that the permission for non-consenting creditors to be bound into an arrangement will only be recognised by the court as a matter of jurisdiction is confined to those persons whose rights in relation to the company are not so dissimilar as to make it practicably impossible for them to consult together with a view to their common interest. (This reflects the classic statement of Bowen LJ. in Sovereign Life Assurance Co. v Dodd [1892] 2 QB 573 at 583)

Mr Allison, having described both the background difficulties and given me a description of the terms of the scheme, then went on to guide me as to the issues which the company had identified as possibly arising in the context of determining proper class composition. He then went on, fourthly, to deal with aspects of the order.

Dealing with each of those four topics in turn, I hope that I have sufficiently for the purposes of this afternoon (and bearing in mind the time) given an adequate description both of the background and of the objectives of the scheme. Secondly, so far as the terms of the scheme are concerned, that is, I think, accurately set out in paragraphs 26 and 27 of the skeleton argument on behalf of the scheme company, are as follows:

“26.

The key features of the Proposed Restructuring (including the Scheme) are set out in the Explanatory Statement [2/C/378-380; 2/C/382-298] and at Waschkuhn, paragraph 54. In summary:

(1)

The Company (on behalf of the Scheme Creditors) will execute and deliver the Security Agent Instruction Letter, the Senior Agent Instruction Letter and the Mezzanine Agent Instruction Letter by which the Scheme Creditors will irrevocably instruct the Agents under the finance documents to execute all relevant Restructuring Documents;

(2)

A €20,000,000 bridge facility loan (“the Bridge Facility”) will be advanced to the Company to bridge the period from the effective date of the Scheme until the New Senior Facility A (as described below) is drawn. In summary:

(a)

It is envisaged that the Bridge Facility will be available until on or before 31 March 2012 when the New Senior Facility A will be drawn and the Bridge Facility repaid.

(b)

The Bridge Facility will have the same ranking as the New Senior Facility A (i.e. super senior and pari passu with the claims of the Super Senior Hedging Scheme Creditors).

(c)

The Bridge Facility will be available to all Senior Scheme Creditors pro rata to their commitments under the Senior Facilities Agreement. The Senior Scheme Creditors will have until 5:30pm on 11 January 2012 to elect to participate in the Bridge Facility. If all the Senior Scheme Creditors do not agree to fund their pro rata share of the Bridge Facility, the balance will be available to those Senior Scheme Creditors who wish to participate in the Bridge Facility to fund. Following this, if there is still any part of the Bridge Facility that remains unfunded, the Investor Scheme Creditors will commit to funding it. This gives the Company certainty that the Bridge Facility will be taken up in full by the Senior Scheme Creditors.

(d)

It is envisaged that the Bridge Facility will be available until on or before 31 March 2012 when the New Senior Facility A will be drawn and the Bridge Facility repaid.

(3)

The Company will execute the Senior Facilities Amendment Agreement on behalf of the Super Senior Hedging Scheme Creditors and the Senior Scheme Creditors. The Senior Facilities Amendment Agreement will contain the following key amendments to the Senior Facilities Agreement:

(a)

A New Senior Facility A term loan will be advanced to PrimaCom Holding in the amount of €20,000,000 with a backstop maturity date of 30 September 2015. The lenders under the Bridge Facility have the option to participate in the New Senior Facility A pro rata to their participation under the Bridge Facility. If the lenders under the Bridge Facility do not all agree to fund their pro rata share of the New Senior Facility A, the lenders under the Bridge Facility that choose to participate may fund the full remaining amount of the New Senior Facility A. Following this, if there is still any part of the New Senior Facility A that remains unfunded, the Investor Scheme Creditors will commit to funding such part. This gives the Company certainty that the New Senior Facility A will be taken up in full by the Senior Scheme Creditors.

(b)

The outstanding amounts under each of the facilities which together make under the Senior Facilities Agreement will be combined into a New Senior Facility B term loan with a repayment dated of 31 March 2017.

(c)

A new uncommitted Accordion Facility of €40,000,000 will be created and it will rank pari passu with the New Senior Facility B and have a maturity date of 31 March 2017.

(4)

The Company will execute the Mezzanine Facility Amendment Agreement on behalf of the Mezzanine Scheme Creditors pursuant to which the claims of the Mezzanine Scheme Creditors will be pushed up to Medfort. This will result in the Company’s total debt burden decreasing by €36,730,447.

(5)

The Company will execute the Mezzanine Deed of Variation on behalf of the Existing Mezzanine Scheme Creditors. The Mezzanine Deed of Variation will confirm that the claims of the Existing Mezzanine Scheme Creditors shall continue to be regulated on the same terms as the Mezzanine Facility Agreement notwithstanding the push up of the claims of the Mezzanine Scheme Creditors to Medfort.

(6)

The Second Lien Creditors will execute the Second Lien Agent Instruction Letter and deliver it to the Second Lien Agent to irrevocably instruct it to execute the Second Lien Restructuring Documents including the Second Lien Facility Amendment Agreement pursuant to which the claims of the Second Lien Creditors will be pushed up to Medfort in the event that no change of control occurs by 1 December 2012. This would result in the Company’s total debt burden decreasing by €32,794,923.59.

(7)

The Intercreditor Agreement will be amended (with the Company acting on behalf of the Scheme Creditors) so that the claims rank as follows:

(a)

The Super Senior Hedging Liabilities and the liabilities under the Bridge Facility or the liabilities under the New Senior Facility A, as appropriate;

(b)

The liabilities under the Senior Facilities Agreement;

(c)

The liabilities under the Second Lien Facility Agreement; and

(d)

The liabilities under the Existing Mezzanine Facility Agreement.

(8)

Medfort and the Company will execute the Mezzanine Deed of Assumption and, at least one business day afterwards (for German tax reasons), the Mezzanine Deed of Consent pursuant to which Medfort will assume the Company’s obligations for the claims of the Mezzanine Scheme Creditors.

27.

It is a pre-condition to the Scheme becoming effective that the above steps have been completed in the appropriate sequence. These pre-conditions are appropriate and unobjectionable.”

I should also mention that, of course, the explanatory statement which accompanies the scheme and sets out in some greater length the various provisions and intended consequences also contains a description of risk factors as is practically always required, and these are set out at some length in part E of the explanatory statement.

The guiding principles as regards the proper composition of classes have been much discussed in authorities of late. The golden thread of these authorities, as I see it, is to emphasise time and again the long-established principle in determining whether the constituent creditors’ rights in relation to the company are so dissimilar as to make it impossible for them to consult together with a view to their common interest the Court must focus, and focus exclusively, on rights as distinct from interests. The essential requirement is that the class should be comprised only of persons whose rights in terms of their existing and the rights offered in replacement, in each case as against the company, are sufficiently similar to enable them to properly consult and identify their true interests together.

I emphasise this point because it does very seriously affect the composition of classes and enables the court to take a far more robust view as to what the classes should be and to determine a far less fragmented structure than if interests were taken into account. I also emphasise it because I had a lingering concern lest a right which was enjoyed in common with another right under the constitution of the company (to take an example, a right as a shareholder as well as a right as a creditor) might introduce complexity into the class structure in the event that some creditors were also investors, as indeed is the case in the present situation. In particular, I had in mind a decision of Templeman J, as he then was, in Re Hellenic & General Trust Ltd [1976] 1 WLR 123, which was, it is to be noted immediately, a case not on a creditors’ scheme but a members’ scheme.

Having raised the point, it does seem to me that in that case Templeman J used the language of interests rather than the language of rights. Nevertheless, as it seems to me, the golden thread as I have described it of substantive authority has invariably been to draw a tight distinction between the two. There is, and it has comforted me, a useful description both of the problems and of the rationale and also of the basis for distinguishing Re Hellenic in paragraphs 21 through 23 in a decision of the Court of Final Appeal in Hong Kong, namely UDL Argos Engineering & Heavy Industries Co. Ltd v Li Oi Lin FACV 11 of 2001. The leading judgment was given by the non-permanent judge, Lord Millett, at paragraphs 21 to 24 of his judgment, and in considering Re Hellenic, Lord Millett said this:

“21.

In Re Hellenic & General Trust Ltd a Scheme of Arrangement was used as a means of effecting a take-over. The Scheme provided that all the shares in the company should be cancelled and that fully paid shares should be issued to H, which would pay 48 pence per share to the former shareholders for the loss of their shares. M, a wholly owned subsidiary of H, already owned more than 50% of the shares. A single meeting of members was called, at which the Scheme was approved by the requisite majority with the help of M's votes. Templeman J refused to sanction the Scheme, holding that M's interests as a wholly owned subsidiary of the purchaser were different from those of the other shareholders who were vendors. He did not merely exercise his discretion to withhold the Court's sanction; he held that the Court had no jurisdiction to sanction the Scheme because a separate meeting of the minority shareholders should have been summoned.

22.

The case was relied on by the present appellants as showing that separate meetings should have been held because the shareholders had conflicting interests rather than different rights, and it is true that Templeman J consistently referred to the parties' respective "interests" rather than their "rights". But it is important not to be distracted by mere terminology. Judges frequently use imprecise language when precision is not material to the question to be decided, and in many contexts the words "interests" and "rights" are interchangeable. The key to the decision is that M was effectively identified with H. It would plainly have been inappropriate to include M in the same class as the other shareholders if it had been buying their shares; it should not make a difference that the purchaser was its parent company.

23.

But this was not because M and the other shareholders had conflicting interests, nor because they had different rights to start with. M's legal rights at the outset were the same as those of the other shareholders. What put M into a different category from the other shareholders was the different treatment it was to receive under the Scheme. The other shareholders were being bought out. In commercial terms M was transferring its shares to its own parent company and obtaining for its parent company the right to acquire the remainder of the shares from the other shareholders. The rights proposed to be conferred by the Scheme on M and the other shareholders were commercially so dissimilar as to make it impossible for M and the other shareholders to consult together with a view to their common interest, for they had none.

24.

In Re Jax Marine Pty Ltd S, an unsecured creditor, also owned all the shares in the company. Under the proposed Scheme he subordinated his claims to those of the other creditors and guaranteed certain payments to be made to those creditors. A creditor who opposed the Scheme argued that separate meetings should be called of S and his associates on the one hand and the independent creditors on the other. Street J acknowledged that S and his associates had a special interest in the promotion of the Scheme which the other creditors did not possess, but he held that this did not preclude them from participating in the same meeting. This feature could be taken into account when the Court came to consider whether to exercise its discretion to sanction the Scheme. At p.148 the Judge said:

"... The fact that this group have an additional interest from the ordinary creditors does not, however, appear to me to go to the length of making their rights so dissimilar from those of the ordinary creditors as to make it impossible for them to consult together..... The existence of this motive or personal interest does not, in my view, preclude the Smithson group from membership of the class of ordinary unsecured creditors....."

"To say that the Smithson group's interests do not preclude their being members of the class is, of course, far from saying that their vote will, if and when a petition is subsequently presented, carry equal weight to that of an unsecured creditor who is not shown to have any special interest. When the petition, if there be a petition, comes before the Court there is ample room within the Court's statutory discretion to decide the petition in accordance with the requirements of justice and equity as those requirements appear to affect the rights of the class and its members. Quite frequently it is necessary to discount, even to the point of discarding from consideration, the vote of a creditor who, although a member of a class, may have such personal or special interest as to render his view a self-centred view rather than a class-promoting view........This Court is accustomed on the hearing of petitions under s. 181 (that is to say at the second stage of the proceedings) to recognizing and taking appropriately into account any special motives or factors affecting particular creditors." ”

Having read that analysis, I am persuaded that there is nothing in Re Hellenic to destabilise, or undo perhaps more accurately, the golden thread as I have described it.

Turning therefore to the particular classes proposed in this case, the classes are four in number: (i) Super Senior Hedging Scheme Creditors, (ii) Senior Scheme Creditors, (iii) Mezzanine Scheme Creditors, (iv) Existing Mezzanine Scheme Creditors and the two elements of mezzanine debt. As it seems to me, the classes which reflect the priorities and in respect of which not dissimilar rights from those presently enjoyed are to be conferred are a good and firm starting point in determining the composition of the classes. The question is whether there are any other factors which tell against what prima facie is the sensible starting point. In this regard, Mr Allison, with care both in his written skeleton argument and his oral submissions, identified points which had been considered but resolved favourably consistently with the class composition as recommended. He addressed first the question of cross holdings, by which I mean the problem that I have alluded to where a given creditor has both a creditor interest and an investor or equity interest.

As I have indicated by reference to Re Hellenic, although as a practical matter a combination of interests may guide, or may be, the motivation on behalf of a creditor in voting as such (that is to say, a creditor may vote not by reference to his interests as a creditor but by reference to his interest as a shareholder) that is not a good reason for undoing or destabilising the class composition which is recommended. That is for the reasons I have described. I would only add, however, this. At the fairness hearing, the question whether any group of creditors even in properly constituted classes have been unfairly coerced by the majority within their class in terms of having been corralled by people whose rights appear similar but whose objectives and interests were poles apart will be taken into account at the hearing. As I say, that is not part of my function now but it is an obvious consideration to be borne in mind and it also enables me to stress at this juncture that any view I express now can also be reviewed by the court at the fairness hearing in accordance with the practice direction.

I should add that in this context I was referred to a number of authorities, including the UDL Argos Engineering & Heavy Industries Co Ltd v Li [2001] 4 HKCFAR 358 case in the Hong Kong Court of Final Appeal to which I have already referred, the Re Telewest Communications plc [2004] EWHC 924 decision, the Re BTR plc [2000] 1 BCLC 740 CA decision, and the Re Cattles plc decision [2010] EWHC 3611 (Ch). I do not propose at this late hour to refer to the various extracts to which I was referred. Suffice to say that I am persuaded that they support the conclusion that I have reached.

A second possible objection was canvassed. This was under the heading of equitable subordination and reflected the possibility that a claim of a shareholder might in certain circumstances be treated as subordinated in terms of other creditors, not as a matter of the contractual rights, but as a matter of German insolvency law. However, I am informed and proceed on the basis that the company has been unequivocally advised that no issue of equitable subordination arises in the present case and, therefore, that is not a good reason either for departing from the most obvious class composition scheme in this case.

Thirdly, and as set out in the explanatory statement, Mr Allison drew carefully to my attention the fact that slightly different interest rates currently apply to the different facilities which together form the senior facilities agreement and, furthermore, within that group there are slightly differing maturity dates. The question, therefore, arises (and it is in a sense a question of judgment rather than scientific assessment) whether those relatively small differences in interest rates (I take it that the variation was between a maximum of 4.25 per cent and a minimum of 2.25 per cent, which is not an entirely negligible spread) is sufficient to give the holders of the higher and the holders of lower such different rights that they cannot properly consult together. Likewise, though less significantly, the issue of different maturity dates.

Having been also by way of comfort referred to the case of McCarthy v McCarthy & Stone plc [2006] EWHC 1851 (Ch), I have concluded for present purposes that the difference in interest rates and the amount of interest payable and the differences in maturity dates are not such as to introduce a jurisdictional requirement for there to be a separate class within the class of senior creditors.

Fourthly, an issue arises by reference to one of the provisions included within the scheme. One of the provisions, and indeed advantages, of the scheme is that there are to be made available bridge facilities in the amount, I think, of €20 million, which will eventually be translated into a new Senior Facility A loan. All Senior Creditors will be entitled to participate in the bridge facility and those that do will become participants in the new Senior Facility A loan. The question arises whether this of itself, that is whether the possibility that some Senior Creditors will not be involved in the bridge facility, of itself causes a reason for a different class composition. I accept for present purposes that given the provision for all Senior Creditors to participate in the bridge facility and thereby to secure for themselves the opportunity also to participate in the new senior facility A loan is sufficient to avoid any class problem which might otherwise arise.

The next possible difficulty identified was related to the lockup agreement pursuant to which creditors have not only given the company a breathing space, as I have described, but also have agreed to vote in favour of the scheme. They have also as part of that contract become entitled to receive a consent fee in the event that the scheme becomes effective. I accept for present purposes that the fact that certain creditors have entered into, in advance of the scheme, a lockup agreement which binds them to vote in favour of the scheme does not of itself give rise to a jurisdictional class issue. Rather, it may give rise to an issue on whether the class is a proper determinant of the rights of objectors when the court considers fairness when it comes to determining whether to sanction the scheme. I am supported in that conclusion by the discussion of not dissimilar arrangements in the cases of Re Telewest Communications plc (No. 1) [2005] 1 BCLC 752 and Re McCarthy & Stone plc [2009] EWHC 712 (Ch).

So far as the consent fee is concerned, two points are advanced by the company. The first is that the lockup agreement is stated to have been available to all senior scheme creditors and thus the fee payable was likewise available to all who sought to participate. The second is that the amount of the consent fee is de minimis when compared to the claims of the Senior Scheme Creditors.

For my own part, I am not persuaded by the first of those reasons, but it does seem to me to be an unlikely determinant of jurisdiction that a relatively small fee should be payable to those who happen to promise their vote on the schemes, which is not an unusual arrangement in the context of schemes such as this. It is most unlikely that the consent fee would determine the behaviour of the member of a given class. Again, I am supported by authority in the shape of Re DX Holdings Ltd [2010] EWHC 1513 (Ch).

Accordingly, and so far I have been treating this as a purely domestic scheme, I do not at present consider that the composition of the classes as suggested would lead to any of the classes being comprised within them of persons having rights in relation to the company so dissimilar as to make it impossible for them to consult together within the class with a view to their common interests. As I said, that can be reviewed, and the question of fairness generally will have to be reviewed, on the occasion of the fairness hearing.

Of course, this is not a wholly domestic scheme and the question which I next have to address is the question of jurisdiction. Within the umbrella of that, there are three points to address. The first is whether a German company such as this is a “company” within the meaning of the relevant section under English law and the Companies Act 2006; that is to say section 899. The second is, if the English court technically has jurisdiction, whether there are sufficiently close connections between the persons and subject matter of this dispute and the English jurisdiction to make it appropriate for that jurisdiction to be exercised or whether the connections are so flimsy that it would be improper to step over cross border boundaries to exercise powers which are very different from the powers available under the German insolvency regime.

The third issue is this. Whatever my view (and ultimately at the fairness hearing whatever the view of the court adjudicating on the scheme under English law) that does not, of course, compel the German courts to take a similar view under their law or under the enforcement of Judgments Regulations. The question, therefore, arises whether whatever might be the view of the English court, those views would be enforceable and effective at this third stage under the relevant German law. I deal with each issue in turn.

I should acknowledge at the outset with all the gratitude I can muster, particularly at this stage of the term, that the first two issues have in not dissimilar contexts been addressed at length in the judgment of Briggs J given on 6 May 2011 in the matter of another German company, which was the scheme company concerned (Re Rodenstock GmbH [2011] EWHC 1104). I hope I will be forgiven for not slavishly going through the analysis which has been so elegantly achieved by Briggs J in that case. Suffice to say for present purposes as to the first of the three points that I agree and certainly have no reason to disagree with the conclusion of Briggs J that for the purposes of section 895, though not for the purposes of section 900, the definition of a company extends to a company liable to be wound up under the Insolvency Act and there is no reason why a German company should not be such a company.

Pausing there, of course my reference to section 900 is to the powers of the English court to facilitate reconstruction or amalgamation, which are very statutory powers which certainly in a members’ scheme, will be difficult to do without. But provided that the company can achieve and implement the scheme without reference to section 900, there is no jurisdictional bar for the reasons given by Briggs J or, put the other way round, a German company may be a company falling within the jurisdiction of the English court under section 895 for the purposes of arrangements and reconstructions.

Turning to the second issue and the question of links or connection with the English jurisdiction, the point which is of centrality for these purposes is the fact that all the creditors concerned in this case are creditors whose debts are governed by English law. I have already had occasion to emphasise also the fact that the inter-creditor agreement is likewise governed by English law. That is so notwithstanding the fact that this company has its centre of main interest (“COMI”) in Germany.

Of course, this is once more a matter which may fall to be reviewed at the fairness hearing, but so far as the link is concerned it does seem to me (and again I am comforted and supported in this by the analysis of Briggs J in the Rodenstock case) that the fact that English law is the governing law for all creditor arrangements does provide a sufficient connection to the jurisdiction to warrant the exercise by the English court of the jurisdiction which I have said it has under section 895.

The third issue is whether, whatever may be the position of the English court, any decision would be given force and effect in Germany. In this regard, I have been provided in evidence with an expert report of Professor Paulus which reaches similar conclusions to those which were relied on by Briggs J in terms of expert evidence in the Rodenstock case.

There are two points to be considered. The first is whether under German law the sanction of a scheme would be recognised under article 32 of the European Regulation on Jurisdiction Recognition and Enforcement. As to this, the question appears to have been considered by the German courts, though the decision is subject to an appeal within that jurisdiction. The upshot of the matter is that the conclusion thus far is that because a scheme is not a contest, the requisite of a ‘lis’ may not be satisfied for the purposes of determining whether the sanction is a judgment falling within the remit of article 32. Professor Paulus considers that the ultimate result will be to determine that a judgment sanctioning a scheme does fall within article 32 but recognises that for the moment that point is uncertain.

The second issue under this head, therefore, is whether the German substantive law (and leaving aside the legal process which is enabled or finessed by the European Regulation on Jurisdiction Recognition and Enforcement) would recognise the appropriate law to determine the relevant extinction or restructuring of rights governed by English law would be English law. In that context, Professor Paulus concludes that since the debts in question are subject to English law, that law governs not only the formation but also the extinction and restructuring of those debts, be it by fulfilment, settlement or, as in question, by a scheme of arrangement.

I pause only to note one further point: this is that Professor Paulus also gives as his opinion that the recognition or enforcement of a scheme of arrangement promulgated and sanctioned under English law would not be incompatible with the public policy of Germany.

Whether at the fairness hearing other evidence is brought to bear to dislodge that conclusion I cannot tell, but for the present it seems to me that there is sufficient ground for the conclusion that the English court exercise of jurisdiction would be given effect in Germany to warrant the scheme progressing to the next stage.

That leaves only two questions to be addressed in terms of the matter before me before looking at the documents concerned. The first one needs only very quick treatment. It was properly but dismissively raised before me whether there was any argument that secured creditors were not creditors within the embrace and meaning of section 895. I have no hesitation in accepting that secured creditors are creditors within that embrace as has been clear so far as I am aware without significant doubt since Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 CA.

The next question is whether the notice and explanation of this stage or juncture of the proceedings and in particular the composition of the classes and the reasons for the scheme itself, have been sufficiently addressed. This was a matter which was considered or on which evidence was given at paragraphs 100 to 103 in the witness statement of Mr Waschkuhn. Again, I consider that there is, for these purposes, a sufficient description of that which is involved. Yet again, and at the risk of repetition, this will also be a matter to be readdressed if it is required to be so at the fairness hearing.

In all of the circumstances, therefore, I consider that the constitution of classes proposed appears sensible and that appearance is not dislodged by any of the considerations put forward to me, though fairness will be a matter to be addressed at a subsequent stage.

That leaves only the question as to whether I should, as I am asked, approve the relevant documentation in the shape of the explanatory statement, the notices convening the meeting, the voting and proxy form, and also the regulations to be applied at the class meetings themselves. It is not easy, particularly given the speed with which this matter has come before the court, to be entirely secure in signing on these documents that they are entire and whole and perfect, but suffice to say that, again with the backstop of the fairness hearing available, I see no reason why not to sign those documents in the usual way. I would only record that Mr Goodison himself, although he may prefer to keep his powder dry for all I know, did not feel it right to indicate any particular defect that had been identified in any of those, nor did he query (and, in fact, all concerned accepted as standard) the various directions for the meetings in question.

What I would add by way of postscript is this. As I have indicated at the outset in trying to deal with the adjournment issue, I have felt a lingering sense of unease that what is truly involved is a scramble for the dominant hand as between creditors with different interests. I very much hope that over the course of the next few days, and through the lifeline of a scheme has been made contingently available, a full and as far as possible open discourse will take place in order to seek to identify an accommodation which does have a better prospect than this of securing the class consents without which a scheme is hopeless.

I should say in that regard, because I have not expressly addressed it yet, that the question of whether the scheme is hopeless has also weighed on my mind and I have very carefully considered the decision in In re Savoy Hotel Ltd [1981] 1 Ch 351 and Re a Debtor (No 13 of 1964), ex pane Official Receiver [1980] 1 WLR 263, which in the context of a case called Validus Holdings Ltd v IPC Holdings & Ors [2009] SC (Bda) 25 Civ I had quite a close association with when at the Bar. I do not, as presently advised, consider that I have the evidence before me to conclude categorically that there is no hope whatsoever of this scheme progressing despite the present position of Mr Goodison’s clients. The abyss is a horrible view, but equally they may stick to their guns and would be entitled to do so, and it is in that context that while allowing the matter to proceed (purely a discretional matter in my judgment), I do not thereby suggest that it would not be right for the company to enter into sustained negotiations on, as I said, as open a basis as possible with a view to an accommodation which would secure that support. On the contrary, I would hope that such negotiations will now take place as a matter of urgency.

Much was made as to whether the Practice Statement letter was sufficient in the context. I do not propose to get into that argument but I do have sympathy with the general proposition put forward by Mr Goodison that everything must depend on the context and given the seniority of the objectors in terms of their position in the waterfall and given the fact that negotiations have been taking place, it would be salutary for there to be maximum co-operation and sharing rather than the minimum necessary. Of course, everyone must be guided by their own perception of their commercial interests and it would be inappropriate, and indeed pretentious of me, to say anything further than that.