Cortefiel, SA v Mep 11.S.A.R.L.

Cortefiel is a Spanish company, which is engaged in retail clothing stores operating in a number of formats and across a wide range of countries. Its principal base is in Spain, but it operates in some 67 other countries.

As part of the acquisition of Cortefiel by its present owners, an associated company, MEP, was established. MEP is a Luxemburg company. The Group’s operations are funded under a single senior facility agreement. There are five facilities extended. Cortefiel has the benefit of facility A, which is in the sum of €20m; facility B1, which is in the sum of some €237m and; a revolving credit facility in approximately €190m. MEP has, as a result of the initial acquisition arrangements, the benefit of a B2 facility in the sum of €260m and a B3 facility in the sum of €415m. There are loss-sharing arrangements and all lenders rank pari passu. In addition to that senior facility working capital is provided by short-term lines of credit by trade suppliers. The lead time for the manufacture of garments is some 10 months and during the time when the garments are being prepared and supplied, Cortefiel itself does not fund that operation, but the supplies do.

There is a prospect that Cortefiel and MEP will each be in breach of their banking covenants. The crunch time may come as early as November, because of the long lead time which is inherent in the manufacture and supply of the garments. There is also a prospect that facilities maturing in 2013 and 2014 will not, if the current economic climate continues, be paid on the due date. Therefore, despite the Group’s ability to maintain its earnings and to generate cash and to reduce debt, the potential breach of the banking covenants would lead to an acceleration of liabilities and bring about a severe cashflow crisis. This would result in a rapid deterioration of the value of the group and very significant debt impairment. Of particular importance in these circumstances is the maintenance of the confidence of suppliers and the continued provision of their credit lines. To that end the group has embarked upon a restructure exercise. The original proposal was for an entirely consensual restructuring, but the current proposal is to affect the restructuring through a scheme of arrangement.

It is in these circumstances that the present application is brought before me. The order which is sought is for the constitution of class meetings to enable the restructuring proposed in the scheme of arrangement to be considered by creditors having a common interest. For Cortefiel it is proposed that there should be a class meeting for those supporting facility A and a separate class meeting for those supporting facility B1 and the revolving credit facility. For MEP it is proposed that there should be a single class meeting of those supporting facilities B2 and B3.

I must first address the question of jurisdiction in the light of Cortefiel being a Spanish company and MEP being a Luxemburg company. I am satisfied that the effect of s.895.2(b) and s.220 of the Insolvency Act 1986 is to make both companies, “companies liable to be wound up” and therefore, there is jurisdiction to entertain the scheme of arrangement. I am satisfied that, although the centre of main interests of either company is not in England and Wales, each has a significant and sufficient connection with this jurisdiction, following the guidelines set out by Briggs J in Rodenstock [2011] EWHC 1104 (Ch). In short, the entire funding is under a single senior facilities agreement, which agreement is governed by English law and contains an English jurisdiction provision. I am also satisfied that if I were to exercise my jurisdiction it would be effective in that any scheme which results from the holding of the class meetings and the approval of the scheme would be recognised in Spain and in Luxemburg and, in that regard as for Spain, I rely on the expert opinion of Professor Garcia Martin and in relation to Luxemburg the opinion of Mr Alan Schteichen.

Being satisfied as to jurisdiction I will therefore, address the present application. I remind myself that the present application is directed to my granting leave to convene meetings and not to consider the fairness of the scheme overall, which is a matter to be considered in due course in the light of the outcome of those creditors’ meetings. I remind myself that the object of the class meeting is to enable creditors to consult together with a view to their common interest and I have been assisted by a passage from the judgment of Lord Millett L, in UDL Holdings Limited [2002] 1 HKC 172, in these terms:

“23.2

Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

23.3

The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. ...

23.4

The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.”

The only commentary I would add, having regard to the facts of the case before me, is that when assessing dissimilarity or similarity it is important to consider the rights in context. One is not considering or comparing a single right. One is considering or comparing a bundle of rights held by creditor A and the bundle of rights held by creditor B, either under the existing loan agreements or under the proposed scheme. In considering that bundle one has to ask in the context at the time of the comparison what the bundle of rights effectively contains. This is what lies behind the observations of David Richards J, in Re Telewest [2004] EWHC 924 at paragraph 29 where he said:

“There is no dispute that, in the circumstances of a case like the present, the relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation. Strictly speaking, because the company is not in liquidation, the legal rights of the bondholders are defined by the terms attached to the bonds. However, the reality is that they will not be able to enforce those rights and that in the absence of the scheme or other arrangement their rights against the company will be those arising in an insolvent liquidation.”

To the same effect was the argument of Mr Sheldon QC to Lewison J in BAIC [2005] EWHC 1621 at paragraph 82 where the judge records the submission in these terms:

“He submitted that the comparison that the court must make was a comparison between the rights that creditors would acquire under the scheme (if approved); and the rights that they would enjoy if it were not. In the latter case the court should consider (and consider only) realistic alternatives. If the company in question was insolvent, then the obvious realistic alternative was an insolvent liquidation. But if the company is solvent, then that is an inappropriate comparator. In some cases, an appropriate comparator might be a members' voluntary liquidation. But that could only be appropriate if it was a realistic possibility.

It is apparent from the remainder of the judgment that that is the approach Lewison J adopted in the case before him by looking at what was the realistic alternative.

Adopting that approach I look at the amendments which are proposed by the scheme, having summarised the rights of the parties at the outset of this judgment. The basic structure of the scheme is to extend the repayment dates for facilities B1, B2 and B3 and the revolving credit facility, but to make a substantial payment in part satisfaction of the sums due under facility A. Accordingly, the interests of the creditors in facility A are dissimilar from the interests of the creditors in the other facilities, hence the separation of that creditor class.

The next proposal is to reset the financial covenants. This is a feature, which is common to all of the existing facilities, and the amendment is common to them all. The third feature of the scheme is to provide a margin increase applicable to each facility. The margin increase is not the same in respect of the revolving credit facility as it is in relation to facilities B1, B2 and B3. That is because under facilities B1, B2 and B3 the interest is effectively rolled up and is repayable at the due date of the facility, whereas in relation to the revolving credit facility the constant passage of cash through the facility means that there is no effective roll-up. So the difference between the margin increases is accounted for by that difference in the economic operation of the facilities; and I am satisfied on the evidence that the proposed margin increases have the same economic effect, although they are at different rates.

The next significant feature is the introduction into the senior facilities agreement of a debt buy-back provision. Under the existing structure if there is something which is defined as “excess cashflow”, then that “excess cashflow” is applied in a mandatory prepayment of the facilities pro rata. The introduction of a debt buy-back is to afford the company the opportunity to offer to lenders the opportunity to buy back part of their debt and in insofar as “excess cash” is not used in that way, then for the mandatory prepayment facilities to be engaged. This is a right which each of the classes of lender has, and being a common right, is a similar adjustment to their rights under the scheme.

In short, I am satisfied that having regard to the significant features of the amendments proposed under the scheme the present constitution of classes creates a class of creditor capable of discussing the adjustment to their rights having regard to their common interests.

There are two specific issues that I ought to address having expressed that view. First, it is the case that some creditors have already entered into “lock-up arrangements”, that is to say they have committed themselves in advance to the acceptance of the scheme. The “lock-up arrangements” to do not affect the constitution of the class meetings. The “lock-up arrangements” arise out of that particular creditor’s perception of their interests in the matter and do not affect their rights under the existing facility or the new rights they will acquire under the scheme. Questions of “lock-up” might be relevant when the fairness of the scheme comes to be examined at a subsequent hearing, but are not at this stage material to the constitution of the class.

Secondly, a specific point of difference was raised in relation to the revolving credit facility. Under the arrangements which presently exist the revolving credit facility is due for repayment before any part of facility B. Under the proposed arrangements there will be almost a common date, within a month. Accordingly the postponement is of greater import to the supporters of the revolving credit facility than to the supporters of the B facilities. That is, however, to look at the rights in a technical and abstract way. If one looks at the rights in the context of what the effective rights are now and will be under the scheme, I am satisfied on the evidence that this is not a difference that has a material effect upon those supporting the revolving credit facility. As is pointed out in the evidence, the revolving credit facility is essential to the day-to-day operations of the Group and its repayment cannot be dissociated from the repayment of the facility B. The two of them stand or fall together. They will either have to be refinanced together or they will have to be restructured together: and in those circumstances, whilst there may be a technical difference under the scheme, there is no effective difference.

In short, if one looks at the scheme as a whole and assesses what are the real rights of the lenders given the company’s impending parlous financial state and prospective breach of covenant and compares them with the rights which are afforded by the scheme, I am satisfied that the classes as suggested are properly constituted and I accordingly grant the order sought.