Noble Group Ltd, Re

The Practice Statement provides,

“It is the responsibility of the applicant to determine whether more than one meeting of creditors is required by a scheme and if so to ensure that those meetings are properly constituted by a class of creditor so that each meeting consists of creditors whose rights against the company are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”

In addition to endorsing the Sovereign Life test, an alternative approach to the class question was suggested by Chadwick LJ in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 (CA) (“Hawk”) at [23]: are the rights of those who are to be affected by the proposed scheme such that the scheme can be seen as a single arrangement with all creditors, or two or more linked arrangements? In Re UDL Holding Ltd [2002] 1 HKC

Whichever approach is adopted, it is clear from authorities such as Hawk and UDL that the focus when defining the classes at the convening stage is on a comparison of the existing rights of the creditors which are to be altered or extinguished by the scheme, and the new rights to which creditors will become entitled under the scheme. The authorities have made it clear that although the court will have regard to the private interests and motivations of creditors when considering whether to give effect to the majority vote at the sanction stage, the individual interests of creditors which are not shared by other members of the class are not to be taken into account at the convening stage.

The rationale for this concentration on rights rather than interests at the convening stage was explained by Lord Millett in UDL at pages 183H-184D,

“Why, it may be asked, should persons with divergent interests be allowed to vote as members of the same class for the purpose of ascertaining whether the Scheme has been approved by the necessary 75% majority, if their votes are only to be discounted or disregarded by the Court when considering whether to sanction it? There seem to be three reasons. The first is the impracticality in many cases of constituting classes based on similarity of interest as distinct from similarity of rights. Re Alabama, New Orleans, Texas and Pacific Junction Railway Co. is an example of this; Re BTR plc is another. A second is that the risk of empowering the majority to oppress the minority to which Bowen LJ referred in Sovereign Life Assurance Company v. Dodd is not the only danger. It must be balanced against the opposite risk of enabling a small minority to thwart the wishes of the majority. Fragmenting creditors into different classes gives each class the power to veto the Scheme and would deprive a beneficent procedure of much of its value. The former danger is averted by requiring those whose rights are so dissimilar that they cannot consult together with a view to their common interest to have their own separate meetings; the latter by requiring those whose rights are sufficiently similar that they can properly consult together to do so. The third reason is that this is mandated by the rationale which underlies the calling of separate meetings. A company can be regarded as entering into separate but linked arrangements with groups whose members have different rights or who are to receive different treatment. It cannot sensibly be regarded as entering into a separate arrangement with every person or group of persons with his or their own private motives or extraneous interests to consider.”

Consistently with Lord Millett’s comments regarding the need to balance oppression of the minority with the dangers of giving a small minority an unjustifiable right of veto, the cases have also indicated that not every difference between the rights or treatment of different group of creditors will necessarily lead to a need for separate classes. Whether such differences do so will depend on a judgment by the court as to whether the differences make it impossible for the groups to consult together with a view to their common interest.

Different judges have sought to explain how to make this judgment in various ways, but the modern trend has certainly been to resist any tendency to increase the number of classes. So, for example, in Re Anglo American Insurance Limited [2001] 1 BCLC 755 at 764, Neuberger J observed in the context of an insurance company scheme that practical considerations were not irrelevant, and that the court should not get “too picky” about potential different classes, or “one could end up with virtually as many classes as there are members of a particular group”. In Equitable Life Assurance Society [2002] BCC 319, policyholders with a wide variety of mis-selling claims were placed into a single class. And in Telewest Communications plc (No.1) [2004] BCC 342 at [40] David Richards J held that it was appropriate to place into the same class two groups of sterling and dollar bondholders who were treated differently by the use of a particular currency conversion date under the scheme than if there had been a winding-up, remarking that “there is a great deal more which unites the bondholders than divides them”.

In making that judgment, as those cases make clear, it is also important to bear in mind that the safeguard against minority oppression is that the court is not bound by the decision of the class meeting, but retains a discretion to refuse to sanction the scheme: see e.g. Hawk at [33] (Chadwick LJ) and [59] (Pill LJ).

In the context of restructuring it has been established that where a scheme is proposed as an alternative to the winding up of an insolvent company, the relevant existing rights are those which creditors would have in a winding-up: see Hawk at [42]-[43]. In particular, as in Hawk, that means that in relation to any proposals under a scheme for determination and adjudication of creditor claims against an insolvent company, the correct comparison is with the rights that creditors would have under the statutory process for proof of debts in a liquidation.

It does not follow, however, that simply because a scheme company is insolvent and seeking to restructure to avoid liquidation, that all creditors should simply be placed into a single class on the basis of an argument that the scheme proposed is the only alternative to the financial Armageddon of a liquidation, and it offers all creditors a return which will at least exceed the dividend that they would be likely to receive in a

Against that background I turn to consider the class issues in this case.

The Company has proposed that Deutsche Bank should be in a separate class of its own for voting purposes. The reason is the different treatment that Deutsche Bank receives under the Scheme from other Scheme Creditors. Under the Scheme, Deutsche Bank’s claims against the Company are divided into two: a “DB Excluded Claim” and a “DB Surplus Claim”. The DB Excluded Claim is for US$58 million and will be released in return for the issue of “New Tranche A2 Asset Co Bonds” which will be issued to Deutsche Bank alone and which will rank senior in all respects to the rest of the Priority Debt. The DB Surplus Claim is for the balance of Deutsche Bank’s claims in respect of the Notes and the RCF. This claim will be treated in the same manner as all other common Scheme Claims. In addition, Deutsche Bank is to receive a fee of US$3.75 million for committing US$75 million for New Money Debt: this is an amount equivalent to the Backstop Fees payable to some of the other Financial Creditors that I will consider below.

Given the favourable and different rights conferred upon Deutsche Bank under the Scheme in respect of part of its claim against the Company (the DB Excluded Claim), it is obvious that there are two linked arrangements under the Scheme: one between the Company and Deutsche Bank, and the other between the Company and the remainder of the Scheme Creditors. It would plainly not be possible for Deutsche Bank to have a discussion as to their common interest with the remaining Scheme Creditors about the proposal from the Company that they should receive the senior New Tranche A2 Asset Co Bonds for part of their claims, because no such senior notes will be issued to anyone apart from Deutsche Bank.

I thus agree that it is appropriate for Deutsche Bank to be placed into a separate class for voting purposes. It is possible to have a class meeting of one creditor where that is the sum total of members of the class (see Altitude Scaffolding Ltd [2007] 1 BCLC 199), albeit that it is more normal for the creditor concerned simply to undertake to the Court to be bound by the terms of the scheme.

A more contentious class issue relates to whether the Other Scheme Creditors should form a separate class from the remaining Scheme Creditors and Deutsche Bank. The two issues, one of which was also picked up in the letter from Ashurst on behalf of Yancoal to which I have referred, relate to (i) the proposals for a Bar Date and for the determination and adjudication of creditor claims under the Scheme and (ii) the requirement that a Scheme Creditor should “risk participate” in order to receive the Priority Debt.

The first issue arises because of the point made above that although, in principle, the Bar Date, determination and adjudication procedure applies to all Scheme Claims, the practical reality is that the claims of the finance creditors holding Notes and RCF debt are unlikely to be the subject to any dispute, whereas the claims of at least some of the

The starting point of the analysis in this respect must be the point made by Chadwick LJ in Hawk that where a scheme is put forward as the alternative to a liquidation of an insolvent company, the existing rights which scheme creditors have are those which they would have in that liquidation. Given the evidence of the Company’s insolvency, I accept Mr. Trower’s submission that the correct comparison for this purpose is that of a winding up in which the claims of the Finance Creditors and the Other Scheme Creditors would all rank equally and be subject to the same procedure for proof of debts. The process under the Scheme for the making, determination and adjudication of Scheme Claims is plainly modelled upon that proof of debt process, albeit that it is manifestly designed to produce a far quicker and cheaper result.

Although Mr. Trower acknowledged that there would be greater uncertainty of outcome for some of the Other Scheme Creditors than the Finance Creditors from being required to undergo the process in the Scheme to establish their Scheme Claims, I accept his submission that this is a potential difference that does not constitute a difference of existing rights against the Company or rights conferred under the Scheme. As he observed, in a winding-up, all provable claims against the insolvent company are subject to the same proof of debt process no matter how they have arisen, i.e. whether they sound in contract, tort or equity, and whatever differences might exist in the potential outcome of that process.

This is not a case, for example, of a closure scheme for a solvent insurance company in run-off, where the alternative to the scheme is simply a continuation of the status quo under which policyholders with claims that had been incurred but not reported (IBNR) could simply exercise their rights to sit tight and wait to see whether or not any claims were actually made against them by third parties to which their policies would then respond, rather than being forced to submit to a process of a bar date and an actuarial estimation: see e.g. the different class meetings ordered by Warren J in respect of the IBNR creditors of the solvent and insolvent companies in Sovereign Marine & General Insurance Co Ltd [2006] BCC 774, and the very recent decision of Hildyard J in Re Stronghold Insurance Company Ltd [2018] EWHC 2909 (Ch).

Accordingly, in my judgment, this is not a case in which the two groups of Scheme Creditors have any relevantly different rights against the Company, and nor are any different rights being offered to them under the Scheme, in respect of the making, determination and adjudication of their Scheme Claims. Any differences in the way in which the process bears upon some of the Other Scheme Creditors as opposed to the Finance Creditors, and any prejudice that they might claim to suffer as a consequence, is a matter that can be raised as a matter of fairness at the sanction hearing.

The issue in respect of the New Money Debt was summarised in the Ashurst letter to which I have already referred. The essence of the point is that whereas the Finance Creditors are accustomed to providing financial accommodation as part of their core business and have already been in a relationship in which they have voluntarily extended credit to the Company, that is not the case with some of the Other Scheme Creditors for whom financial accommodation is not part of their core business and whose claims are said to have arisen in an involuntary way because they have been wronged by some breach of contract or tort by the Company. The Ashurst letter implies that such Other Scheme Creditors will obviously not be in a position or would not wish to elect to “risk participate” by advancing new money, and hence that they are in reality being offered a separate deal by the Company which is limited to the Basic Creditor Scheme Consideration and does not include the structurally senior Priority Debt.

The response of Mr. Trower for the Company and Mr. Allison for the Ad Hoc Group was that all Scheme Creditors are offered a proportionate right to “risk participate” in the New Money Debt and as a consequence receive the more valuable Priority Debt, and hence there is no difference between them in rights to be conferred under the Scheme which would necessitate placing the Other Scheme Creditors into a separate class from the Finance Creditors. They both characterised any inability or reluctance on the part of some of the Other Scheme Creditors to advance new money to be the result of their individual situations and commercial interests rather than any difference in rights.

Before addressing these issues I should deal briefly with a related jurisdictional point which arose in the course of argument. Part 26 applies to a “compromise or arrangement” proposed between a company and its creditors. In APCOA (No.2) at paragraphs [133]-[167] Hildyard J inclined to the view that this jurisdiction does not enable new and additional financial obligations to be imposed on creditors such as requiring them to provide new guarantees and indemnities to third parties. Hildyard J declined, however, to express a concluded view, not least because when he indicated that that was his provisional view, the scheme was amended to make the provision of such new obligations an option for scheme creditors rather than a compulsion: see paragraph [162]. Whilst I would respectfully share Hildyard J’s provisional view as to the scope of the Part 26 jurisdiction in this regard, in the case of the Scheme, no such jurisdictional objection arises because “risk participation” in return for New Money Debt is not mandatory, but an option.

On the class question, and not without some hesitation, I accept the submissions of Mr. Trower and Mr. Allison. The point is an important one because, as I have indicated, the Priority Debt is clearly the most attractive and valuable consideration on offer to Scheme Creditors under the Scheme. However, it is undoubtedly the case that the opportunity to elect to “risk participate” in return for the Priority Debt is a right that is offered to all Scheme Creditors under the terms of the Scheme. Further, although the Scheme includes provisions under which Scheme Creditors who wish to risk participate can do so in one of two methods – through an Intermediary Bank or the Cash SPV – those alternatives are included to make it easier for all Scheme Creditors to accept the offer if they choose to do so and do not amount to any material difference in the rights offered.

I also accept that the reasons why some of the Other Scheme Creditors might be very reluctant or even unable to elect to risk participate ultimately relates to their individual circumstances and commercial interests. As Lord Millett indicated in UDL, it would generally be impractical to attempt to constitute classes based upon an investigation of such matters at the convening stage. As Jonathan Parker J observed in BTR plc [1999]

Although I could venture a view, based upon what I am told about the way in which some of the claims of the Other Scheme Creditors have arisen, that they are likely to be very reluctant to risk participate as a means of acquiring the Priority Debt, I simply do not know enough about them, their resources or their attitude to financial risk to be able to conclude with any certainty at this stage that this is the case. Nor indeed do I know enough to conclude that every Financial Creditor will have the same appetite for risk and be willing to put up new money and elect to risk participate. That position may only become clearer at the date of the sanction hearing.

My hesitation arose because I was concerned that the manner in which the opportunity to elect to risk participate was offered to the Other Scheme Creditors under the Scheme as originally formulated meant that the offer was an illusion. My main concern lay in the fact that although the essential details of the Restructuring proposals had been discussed and known to the Ad Hoc Group and others who had signed the RSA for some time, and the terms of the New Money Debt and the risk participation agreements had plainly been negotiated among that group for some time, that would not be the case for all Scheme Creditors. In particular, the Other Scheme Creditors unconnected with the Company will be dependent upon receipt of the lengthy Explanatory Statement and its voluminous appendices to commence their due diligence and commercial consideration of whether to elect to risk participate. Coupled with the original timetable under which the risk participation election had to be made by, at the latest, the date of the Scheme Meeting on 8 November 2018, that fact meant that there was, in my view, an impossibly short time within which such Other Scheme Creditors could have been expected to assess the merits of risk participation and make the necessary arrangements to find the money to do so. An offer which does not give the offeree the essential information with sufficient time to consider it and make the necessary arrangements to participate is not a real offer.

When I made that concern known at the hearing, a revised proposal was formulated under which the election to risk participate can now be delayed for a further 6 days until 14 November 2018, and the risk participation deadline by which the arrangements need to be in place has been extended by 5 days to 20 November 2018. Whilst still very tight indeed for a matter of this complexity given that the Explanatory Statement was only due to be dispatched on 17 October 2018, the extension of the timetable meant that I cannot conclude at this stage that the timescale is still impossibly short.

In reaching that conclusion I do not, of course, rule out the possibility that a dissenting Scheme Creditor might wish to argue at the sanction hearing that the proposals under which the Priority Debt is given in return for risk participation in the New Money Debt is fundamentally unfair to those who do not wish (as they might see it) to throw good money after bad, or that even the revised timetable for the decision to be made on risk participation is unfairly short. They might also wish to argue that the timetable for consideration of the Explanatory Statement itself prior to the Scheme Meetings is unacceptably short. Those arguments must all be open at the sanction hearing, but as I see it they go to the Court’s discretion whether or not to sanction the Scheme, rather than to the class question.

It seems to be an increasingly common feature of modern restructuring practice for a group of larger or more active creditors of a company in financial difficulty, to band together into a so-called “ad hoc group” and to approach the debtor company to negotiate a restructuring deal. The ad hoc group may provide a beneficial focal point for negotiations with a wide variety of creditors, and the members of the group may provide or arrange interim financial support for the distressed company. However, the identity and criteria for membership of such a group is often opaque; the group may comprise hedge funds and others who have bought their debt as a speculative investment on the secondary market, and are simply seeking a financial return through the restructuring process; and the group may exercise considerable commercial leverage in that they are in a position to block an alternative rescue plan with which they do not agree.

It has also become commonplace in complex restructurings for the members of such ad hoc groups to demand and receive a variety of payments during the process of negotiation, under the scheme and the wider restructuring, and under new trading facilities which may be made available to the business after the restructuring takes effect. Any payments to a limited group of creditors in connection with a restructuring can have a potential impact both upon the class question and upon the question at the sanction hearing of whether, to the extent that the recipients of such payments make up the majority voting in favour of the scheme, they are really representative of the interests of the wider class of creditors as a whole. Of necessity, therefore, the making of such payments carries with it a requirement for full and frank disclosure to the Court throughout the scheme process, together with absolute transparency and disclosure to all creditors in the Explanatory Statement.

This case is no exception. As I have indicated, the Company has been engaged in complex and substantive discussions with the Ad Hoc Group and other major creditors such as ING and Deutsche Bank over the structure and details of the Restructuring. ING and Deutsche Bank have each been paid substantial fees for continued financial support to the Company during that process.

In addition, as well as agreeing to pay each of Akin Gump’s and Houlihan Lokey’s professional fees, expenses and disbursements in connection with representing and advising the Ad Hoc Group in relation to the Restructuring, the Company has made a number of other payments to members of the Ad Hoc Group during the last year. These are referred to in the documents as “RCF Waiver Fees”, “Work Fees” and “Interim Facility Fees”. The members of the Ad Hoc Group will also receive payment of socalled “Backstop Fees” under the Scheme. In so far as those payments to or for the benefit of the members of the Ad Hoc Group have been made or will be made to some, but not all, of the Scheme Creditors, they potentially raise class issues.

The original evidence in relation to the circumstances leading to the payment of these fees was minimalistic. There was no evidence of the amount of the legal and professional fees paid or payable, and there appeared to me to be a marked reluctance that the members of the Ad Hoc Group should even be identified in any documents placed before the Court (even to the extent of redacting their identity in the exhibited copy of the RSA).

Although I have no further information in relation to the legal fees, further information was provided at my insistence at the hearing in relation to the identity of the members of the Ad Hoc Group and the other payees, together with more detail concerning the so-called “Work Fee”. In summary, the fees appear to be as follows. The RCF Waiver Fees

In consideration for the grant of a temporary waiver in relation to non-compliance with various terms of the RCF in August 2017, the Company paid the RCF Creditors who consented to the waiver a fee of 0.15% of that RCF Creditor’s commitments under the RCF Agreement.

Pursuant to an agreement reached in December 2017, in consideration for the grant of an extension to that waiver, an amount equal to 1.5% of the outstanding principal amount under the RCF was capitalised on 30 April 2018. This increased the amount outstanding under the RCF by US$17,151,900.

Pursuant to the same agreement in December 2017, a further cash payment of about US$11.4 million was payable on 30 April 2018 for a continued waiver of the breaches of the RCF, but in fact was not paid by the company until 29 June 2018. Of this amount, US$3,861,800 was paid to members of the Ad Hoc Group, and US$7,572,800 was paid to RCF Creditors who were not members of the Ad Hoc Group.

At or about the time in late 2017 that it was agreed that some of the RCF Creditors and some of the Noteholders would form the Ad Hoc Group, it was agreed in principle with the Company that the members of the Ad Hoc Group would, in addition to payment of their fees charged by Akin Gump and Houlihan Lokey, be paid what is described in the evidence as “a fee in consideration of their work in negotiating the terms of the Restructuring” (the “Work Fee”). The Work Fee was agreed to be 2% of each member of the Ad Hoc Group’s Scheme Claims, subject to a total cap of US$40 million, and was agreed to be payable on 30 April 2018 even if a restructuring was not implemented.

The Company did not pay the Work Fee on the due date of 30 April 2018 because of concerns over its liquidity and access to trade finance. Thereafter certain of the members of the Ad Hoc Group agreed to provide cash collateral for US$117 million of additional trade finance lines under an interim facility provided by Deutsche Bank Singapore (“DBS”) to NRIPL (the “Interim Facility”). The Work Fee arrangement was renegotiated at the same time and a second letter agreement letter entered into on 29 June 2018. This provided for the outstanding Work Fee to be paid by 3 July 2018, together with an additional Work Fee of 0.95% of the Scheme Claims of a further member who had joined the Ad Hoc Group mid-way through negotiations in March 2018.

The Work Fee was in fact paid by the Company on the same day as the second letter agreement was signed, 29 June 2018, and amounted to just over US$36 million. A number (but not all) of the members of the Ad Hoc Group who received the Work Fee then agreed to provide cash collateral of US$58 million under the Interim Facility.

As indicated, in early July 2018 DBS entered into the Interim Facility with NRIPL. The members of the Ad Hoc Group agreed to a risk participation arrangement with DBS in relation to that facility, in respect of which they were each paid a fee in cash by the Company of 4% of their commitment. The total amount paid on 5 July 2018 was US$ 4.68 million. The fee was not conditional upon the Restructuring being achieved.

As indicated above, a key feature of the Scheme is the provision to the group of the New Money Debt by those Scheme Creditors who agree to “risk participate”. To ensure the availability of the new facilities, the issue of those bonds under the Scheme is underwritten (“backstopped”) by the members of the Ad Hoc Group and a number of the other Finance Creditors. This “backstop” has been provided in two phases.

At the time that the RSA was announced on 14 March 2018, the members of the Ad Hoc Group (referred to as “the Initial Lenders”) entered into a conditional risk subparticipation agreement pursuant to which they each committed to fund a pro-rata share of the total amount of the new facilities. Each Existing Notes Creditor and Existing RCF Lender (including the Initial Lenders) was subsequently offered the opportunity to risk participate for a pro rata amount of New Money Debt as a “Backstop Lender”.

In consideration for backstopping the New Money Debt, the Company will pay “Backstop Fees” to each Initial Lender and each Backstop Lender on the Restructuring Effective Date. Each Initial Lender shall be entitled to a Backstop Fee from the

The Backstop Fees are intended to compensate both the Initial Lenders and the Backstop Lenders for their commitment to underwrite the New Money Debt in circumstances where not all Scheme Creditors would be willing to risk participate in the New Money Debt. The fee of 3% payable to the Initial Lenders in respect of their initial commitment is said to reflect their early commitment to underwriting the New Money Debt at a time when the RSA had only just been announced and it was uncertain whether any other Backstop Lenders would be willing to risk participate for the New Money Debt.

In aggregate, and in addition to the US$3.75 million to be paid to Deutsche Bank (see above) the Company expects to pay US$31.25 million in Backstop Fees if the Restructuring is completed. Of this, US$25,675,040 will be payable to members of the Ad Hoc Group and the balance of US$5,574,960 will be payable to finance creditors who are not members of the Ad Hoc Group.

In submitting that none of these fees gave rise to a class issue, Mr. Trower QC suggested that each of the fees that I have described were de minimis. I do not think that is the right approach. Excluding the fees payable to Deutsche Bank, by my reckoning, the total fees paid and payable to which I have referred (which it will be recalled do not

In that regard I would also repeat the helpful suggestion made by Nugee J in Re Codere Finance (UK) Limited [2015] EWHC 3206 (Ch) at paragraph [4] and reiterated by me with an additional suggestion from counsel in Global Garden Products at paragraphs [46]-[48]. In addition to dealing with such matters fee by fee, the evidence should also include a statement of what, cumulatively, any particular creditor or creditors stood to get out of the scheme or the wider restructuring that was different from that available to the general body of creditors. That course was not followed in this case until I requested such a statement.

That said, I have concluded, again with some hesitation, that whether taken separately or together, the fees to which I have referred do not require me to convene a separate class meeting of the Ad Hoc Group. At this stage the relevant question which I have to ask is whether the payment or anticipated payment of those fees means that the members of the Ad Hoc Group cannot consult together with other Scheme Creditors in their common interest, or whether the making of such payments or promised payments amounts to a separate arrangement or compromise being offered to the members of the Ad Hoc Group. I stress that at this stage I say nothing about the fairness or otherwise as between Scheme Creditors of such payments having been made, or as to the adequacy of disclosure in relation to them in the Explanatory Statement: those are matters for the sanction hearing.

As regards the class question, subject to an important caveat, I accept in general terms the proposition that payments made by a company to some creditors independently of a proposed scheme and its associated restructuring agreements, which are not dependent upon the scheme taking effect, ought not to come into the equation for class purposes. The simple reason is that they would not be part of the scheme proposal which all scheme creditors have to consider at the relevant meetings. This was, I think, what David Richards J was alluding to when considering the effect of payments in connection with voting (“lock up”) agreements in Telewest Communications plc [2004]

The important caveat is that any such prior payment which is made to some, but not all, creditors must have been made for legitimate reasons and be genuinely independent of the scheme and restructuring. In other words, it should not amount to a disguised part of the consideration offered under the scheme and restructuring. I alluded to such a requirement when questioning the legitimacy of the “work fees” paid in Global Garden Products at paragraphs [15] and [53]. On the facts of that case I was able to take the view that the payments had been made available to all creditors, and that they were of a relatively low amount (an order of magnitude different to the fees in this case), so that they did not give rise to a class issue.

I have also previously made the point that the Court is not bound at a convening hearing to take at face value bare assertions in the evidence. The scheme company has the burden of adducing evidence of sufficient quality to persuade the Court to act, and it has a duty to make full and frank disclosure of all relevant facts and matters to the court: see Indah Kiat at [40].

In that respect, I was initially concerned by several aspects of the evidence as regards the RCF Fees and the Work Fees. The evidence was that prior to the formation of the Ad Hoc Group, the RCF waiver fee paid in August 2017 was a mere 0.15%. However, after the Ad Hoc Group became involved, it would seem that in or around December 2017 the Company agreed to pay the vastly increased sum of 2.5% of the outstanding principal amount of the RCF loans for an extension of that waiver (1.5% capitalised on 30 April 2018 and 1% in cash on 29 June 2018). No explanation has been provided for that dramatic increase.

At or about the same time, it would seem that the Company also agreed in principle to pay a “Work Fee” to the members of the Ad Hoc Group of 2% of their debt (subject to a cap of US$40 million), which seemed on its face to have been computed simply on the basis of holdings of debt rather than by reference to any identifiable or measurable work actually done or to be done.

As I have indicated above, the amounts involved in these two payments were very significant, being about US$28.5 million and US$36 million respectively. The payments also appeared to have been agreed in principle at or about the same time as an agreement for the restructuring was reached in principle with the Ad Hoc Group in January 2018, and the payments were scheduled to be made after the execution of the RSA.

After I raised these points regarding the Work Fee at the hearing, further evidence was adduced from Mr. Neil Devaney, a partner of Akin Gump, explaining the background to the Work Fee and reiterating that it was payable by the Company even if the Restructuring was not implemented. Mr. Devaney exhibited the letter agreements in relation to the Work Fee and expressed the belief that the Work Fee was a “commercial fee” paid in return for the members of the Ad Hoc Group committing their time and resources to negotiations with the Company. He stated that the fee was “intended to incentivise” RCF Creditors and Noteholders to work together as the Ad Hoc Group to streamline the negotiation process and reduce costs, and to compensate them for time spent and “opportunity cost” resulting from participation in the negotiations.

Mr. Devaney also stated that the Work Fee was paid as a percentage of holdings for “pragmatic reasons”, namely that “the members of the Ad Hoc Group are financial institutions that do not typically record their time in any accurate or meaningful way”, and “whilst it was expected that all members of the Ad Hoc Group would contribute to the negotiations, it was assumed that those members whose holdings [of debt] were relatively larger than the others would be more involved in the detailed discussions and documentation…”. In other words, “it was assumed that those with the most invested would do the most work.”

Mr. Devaney’s evidence does not in fact indicate on what basis or assumptions as to the time to be spent or opportunity costs the figure of 2% (or the cap of US$40 million) was arrived at, rather than any other percentage or cap. Moreover, whilst the letter agreements exhibited to Mr. Devaney’s witness statement contain detailed provisions as regards payment of the Work Fee and a series of exclusions of responsibility or liability on the part of the members of the Ad Hoc Group, it is noticeable that they do not actually contain any provisions which oblige the Ad Hoc Group to do any work at all, simply recording that the Work Fee is paid “in consideration of each Member’s work in connection with the negotiation of a [financial restructuring of the financial indebtedness owed by the Company to each Member]”.

For the Company, Mr. Brough simply commented in his second witness statement that that he understood from the Company’s advisers that the Work Fees were “in line with market practice for other restructuring transactions” and that “the amount of time the Ad Hoc Group have spent on this restructuring far exceeds that which I expected at the beginning of the process”.

I am not wholly convinced by this evidence. However, at this stage and without further investigation or disclosure, I cannot reject it or conclude that the RCF Fees agreed in December or the Work Fees are not what they are represented to be. Having regard to the tight timetable for completion of the Scheme to which I have referred, I have been persuaded to proceed at this stage on the basis that the RCF Fees and the Work Fees do not form part of the consideration offered under the Scheme, that they were not offered in exchange for the execution of the RSA under which the Ad Hoc Group promised to support the Scheme, and that the fees in question have been paid for legitimate and genuine reasons independently of the Scheme. On that basis they do not require me to convene separate class meetings of any of the Scheme Creditors.

The Backstop Fees are in a different category, because, as indicated above, they do form part of the Restructuring and they are dependent upon the Scheme being sanctioned. They were, however, not offered to all Scheme Creditors and are to be paid in differing amounts depending upon whether the Scheme Creditor was an “Initial Lender” or not.

Mr. Brough’s initial evidence for the Company as regards the Backstop Fees was as follows,

“132.

I understand that the Backstop Fees are in line with market comparators for underwriting (and indeed are lower than fees payable on other restructuring transactions) and that due to the Company’s current financial position, the Company would be unlikely to obtain underwriting from a third party on equivalent terms in the market and in the time available.

133.

It is unlikely that a Backstop Lender (who is not entitled to the 3% Backstop Fee payable to Initial Lenders …) or a Scheme Creditor who is not a Backstop Lender who consider any substantive aspect of the Scheme to be against its interest would be persuaded to vote in favour of the Scheme by the existence the Backstop Fees. The alternative of insolvent liquidation would result in the Scheme Creditors suffering very significant losses compared to the proposed rights under the Scheme and in that context the Backstops Fees are not material factors in their decision making process.”

I pointed out at the hearing that this evidence was unsatisfactory because Mr. Brough did not give any support for his “understanding” in paragraph 132, and his assessment of what a Backstop Lender or Scheme Creditor might or might not be persuaded to do in paragraph 133 simply made no sense. Mr. Brough then clarified and expanded his evidence to indicate that what he had intended to say was that in his view the Backstop Fees are not sufficiently high to induce the recipients of those fees to vote in favour of the Scheme. He said that he based this understanding on information concerning the price at which the Notes have traded over the last three years, which showed that they have rarely traded below 40 cents in the US$. Mr. Brough drew the inference that this would have been the lowest price at which the members of the Ad Hoc Group would have acquired their holdings of the debt.

Mr. Brough also indicated that he had asked for a table to be prepared by the Company’s advisers setting out the level of backstop fees of which they are aware on other transactions. That showed the fees payable in a number of rights offerings in various jurisdictions (mainly the US) from December 2010 to February 2018, with a mean of 6.3% and a median of 5%.

For good measure I was also sent emails from three members of the Ad Hoc Group stating that the Backstop Fees that they were to receive were less than 1.5% of their holdings of senior debt, which in context clearly meant the face value of such debt. Two of those emails referred in general terms to the losses that the creditors concerned contended would be suffered in a liquidation of the Company, and they all variously asserted that the creditor regarded the Backstop Fees as immaterial, irrelevant or entirely separate to their decision to support the Restructuring and vote in favour of the Scheme.

These emails and the opinion by Mr. Brough concerning the likely impact of the Backstop Fees upon the creditors due to receive them was doubtless formulated with a number of previous scheme authorities in mind. In particular, at the convening hearing in Re Primacom Holding GmbH [2013] BCC 201, Hildyard J considered whether the payment of a “lock-up” or “consent” fee to creditors entering into an agreement to support and vote in favour of the scheme fractured the class. He stated, at [56]-[57],

“56.

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.

57.

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).”

A similar point was taken up by David Richards J at the sanction hearing in Re JSC Commercial Company Privatbank [2015] EWHC 3299 (Ch) (“Privatbank”) at paragraph [25] where, when considering his discretion whether to sanction the scheme or not, the Judge did place some reliance upon the fact that the fee in question had been available to all noteholders. He then continued, at paragraph [26],

“26.

One test for considering the relevance of this type of agreement is whether the fee is sufficiently small as to be very unlikely to have a material effect on the decision of a creditor to support the scheme. While Mr Smith QC, appearing for the Bank, pointed to the fact that the fee was only 2% of the principal amount outstanding on the Notes held by a Noteholder entering into such agreement, he readily accepted that materiality might more appropriately be judged by reference to the price at which Notes had been acquired by a Noteholder. If, for example, Notes were acquired at a price of 25 cents per US $1 nominal of Notes, a fee of 2% of the nominal value might well be considered material. However, I need not explore this further in the circumstances of the present case, given the factors to which I have already referred.”

For my part, I think that in a case in which any form of fees are offered to some, but not all scheme creditors contingently on the scheme being sanctioned, the Court will inevitably have to form a view about the materiality of the fees when judging whether the rights of the creditors who will not be paid the fees are sufficiently dissimilar that they cannot consult together with a view to their common interest with those who will be paid the fees. Put simply, if the fees are immaterial to the decision, then the creditors can consult together: if they are material, then they probably cannot.

In making that evaluation, I think the Court will obviously have regard to the level of the fees in question, but in most cases I do not think that it is appropriate simply to look at the percentage which the fee bears to the face value of the debt held by the potential recipients. As David Richards J suggested in Privatbank, that notional figure is unlikely to be a meaningful one in a situation where the company is in financial distress, where its debt is trading at much less than its par value and where the return in a liquidation is predicted to be very low. Likewise, it is hardly meaningful for creditors to talk in

What would seem to be far more relevant is the size of the fee when compared to the predicted returns offered to all creditors under the scheme and the returns that creditors are predicted to make in a liquidation. Moreover, in a case in which the fees are offered in return for the provision of financial support or other financial accommodation or risk, as opposed to simply being offered in exchange for an agreement to support the restructuring, evidence as to whether the fee includes an element of bounty or is in line with market rates will also be relevant. The court can then make a judgment as to whether the value of the extra fees is likely to make a real difference to the decision faced by the creditors who will receive them and those who will not.

In reaching this assessment, the Court is unlikely to be much assisted by self-serving assertions by the creditors who have negotiated to receive the fees in question that they regard them as immaterial to their own decision whether or not to support the scheme. The Court is likely to be more interested in argument from creditors who do not stand to receive the additional payments. That emphasises the importance of ensuring that all creditors receive the Practice Statement in good time, and it is worth reiterating that creditors who attend to raise legitimate points in a constructive manner at a convening hearing can expect to receive their reasonable costs irrespective of the outcome, rather than being discouraged from attending by concern over exposure to adverse costs orders. If there are no such creditors in attendance, it should be regarded as part of the role of counsel for the scheme company not only to identify the class issues and to provide what he or she contends are the answers, but also to identify for the assistance of the Court how the rival arguments might be put.

In this case, as I have indicated, the Scheme is projected to return 24.7% and 33.8% of an accepted Scheme Claim to a non-Participating Creditor, and between 47.4% and 58.4% of an accepted Scheme Claims to a Participating Creditor. That contrasts with a liquidation recovery which is estimated at between 19.5% and 30.3% for all creditors. The parties who stand to receive Backstop Fees will inevitably be Participating Creditors.

Given those figures, I suspect that an additional return in the region of 1.5% to the Participating Creditors who also receive Backstop Fees, will make very little difference to the decision of a Scheme Creditor who does not want to risk participate and who will primarily be focussing on the disparity between the likely returns to the Participating and non-Participating Creditors in general. I also think that Participating Creditors who are not going to receive any Backstop Fees are unlikely to be much troubled by the fact that other Participating Creditors will be receiving a Backstop Fee for taking on an underwriting obligation that I am led to believe is within market norms.

In those circumstances, and in spite of some real doubts, I cannot conclude on the evidence that the payment of the proposed Backstop Fees makes it impossible for Scheme Creditors who do not stand to receive them to consult with those who do.

In reaching my decision on classes, in addition to the analysis set out above, I have also had regard to considerations of practicality, together with the observations made both by Chadwick LJ in Hawk and by Lord Millett in UDL about the dangers of formulating too many classes so as to give a small minority a right of veto over a scheme.

As to considerations of practicality, I have focussed above on the differences between the Scheme Creditors as a whole and (i) the Other Scheme Creditors, and (ii) the Ad Hoc Group. However, when one considers the impact of the different fees (including in particular the Backstop Fees) it is apparent that the Finance Creditors could be divided into a number of classes depending, for example, on whether they were Initial Lenders or only Backstop Lenders. I am concerned that such sub-division would be unworkable.

Moreover, as regards questions of giving a minority a disproportionate right of veto, as I have indicated, the total claims of the Financial Creditors amount to some US$3.449 billion. Apart from any guarantee or indemnity claims, there are only a handful of identified Other Scheme Creditors who I have listed above, and the claims of all Other Scheme Creditors are expected to amount only to about US$100-200 million (the higher figure being described as “unlikely”). Requiring the Other Scheme Creditors to be placed into a separate class would, I think, be giving them a disproportionate right of veto which I do not think could be justified in the absence of a very clear dissimilarity of rights.

In reaching that conclusion, I should not in any way be taken to be suggesting that the proponents of a scheme can offer manifestly different and unfavourable rights to a small minority and then seek to justify binding them into a larger class by protesting that they cannot be given a right of veto. If that is what, on analysis, the scheme in question requires, then so be it: the solution for the proponents of the scheme if they fear that the small class would vote against the scheme would be to reformulate the proposals. But if the class question is finely balanced, I think it is legitimate for the reasons given by Chadwick LJ and Lord Millett to lean towards a broader view, leaving questions of minority protection and fairness to the sanction stage.

I therefore concluded that it was appropriate to convene one meeting for Deutsche Bank and a second meeting for all other Scheme Creditors.

Each of the series of Notes has been issued in global form, either by way of a global certificate (as in the 2018 and 2022 Notes) or as a global security (as in the 2020 Notes). In each case, legal ownership of the Notes passes by registration and the legal owner is the nominee of a common depositary. A question, therefore, arises over whether the legal owner of the global Note is the only creditor which should be entitled to vote, or whether the underlying beneficial Noteholders should have this entitlement.

This issue has arisen in a number of other schemes and it is now well established that if the relevant instruments provide that beneficial Noteholders can acquire direct rights against the Issuer in some (even remote) circumstance, the underlying beneficial Noteholders can properly be classified as “contingent creditors” of the company, and arrangements should be made to enable them to vote so as to enfranchise those with the ultimate economic interest in the debt: see e.g. Re Castle Holdco 4 Ltd [2009] EWHC 3919 (Ch) and Re Co-operative Bank Plc [2013] EWHC 4072 (Ch) at [38].

In the present case, each series of Notes contains provisions enabling beneficial Noteholders to acquire direct rights against the Issuer in certain circumstances. I am therefore satisfied that the beneficial Noteholders can and should properly be regarded as contingent creditors. The trustees in respect of each of the series of Notes have also undertaken not to vote at the Scheme Meetings to ensure that there is no double counting.

Further, in the event of a vote being cast by more than one creditor in respect of the same debt, the Chairman of the meeting shall be authorised to count only the votes of the person with the ultimate economic interest in that debt. This is primarily to reflect the fact that, in respect of the English law Notes and New York law notes, account participants may hold an interest in Scheme Claims without being their ultimate beneficial owner. Further, where an account participant holds interests in the Notes on its own account and/or on behalf of one or more ultimate beneficial owners, I have given a direction to enable the votes of the account participant to be split to reflect the votes of the underlying beneficial owners of the Notes.

As I indicated at the outset, it is the intention of the Company to seek recognition of the Scheme under Chapter 15 of the US Bankruptcy Code. To that end, by resolutions passed on 12 October 2018 the board of the Company appointed Mr. Brough, its Chairman, and Mr. Jeffrey Alam, its General Counsel, to be the Company’s foreign representatives for one year. The two representatives were given authority to bind and represent the Company with respect to the Scheme and the Bermuda scheme. This would include seeking relief available to a “foreign representative” under proceedings to be filed in the US Bankruptcy Court for the Southern District of New York seeking recognition of the Scheme under Chapter 15 of the US Bankruptcy Code.

In addition to the order convening the Scheme Meetings, the Company also sought a declaration that Mr. Brough and Mr. Alam have been validly appointed by the board of directors of the Company for such purposes in respect of the Scheme.

My inherent jurisdiction to make a declaration is a discretionary power and the authorities indicate that whilst the court will not decide hypothetical issues, the jurisdiction does not depend upon the existence of a dispute: Rolls-Royce plc v Unite [2010] 1 WLR 318 at paragraphs [118]-[120]. The cases also indicate that in deciding whether to grant a declaration the Court should take into account, among other things, whether to do so would serve a useful purpose: see e.g. Financial Services Authority v Rourke [2002] C. P. Rep. 14 (Neuberger J).

In the past, Judges of this Court have been prepared to make declarations of due appointment of representatives of English scheme companies for the purposes of assisting the companies to seek recognition in other jurisdictions of schemes sanctioned by this court: see e.g. Re Telewest Communications Plc [2004] BCC 342 at [60]-[61]. Although not dealt with expressly in Judge Peck’s evidence, Mr. Trower informed me that such declarations have proved useful in practice in seeking recognition in the US.

In this case, however, the Company is not an English company but a Bermudan one. Questions of who has been validly appointed to act for the Company will therefore be governed by the law of the place of the Company’s incorporation – i.e. Bermuda: see Banco de Bilbao v Rey [1938] 2 KB 176. I have therefore simply proceeded on the basis that I should grant the declaration sought to assist the Company in so far as it concerns the English Scheme, and on the assumption that Bermudan law in relation to the appointment of an agent is the same as English law. If necessary, the matter should be raised before the Bermudan Court.

I should also make clear, for the avoidance of doubt, that neither person appointed by the Company in relation to the Scheme has the status of an office-holder under the Insolvency Act 1986, nor that of an officer of this Court. In making the declaration, I also do not intend in any way to prejudge the question of whether such persons qualify as a “foreign representative” under Chapter 15, which is, of course, entirely a matter for the US Bankruptcy Court.

I have already indicated above that I considered the original timetable proposed by the Company for the dispatch of the Explanatory Statement, the holding of the Scheme Meetings and (more particularly) the making of the election to risk participate election to be too short, and that in response the Company provided a revised timetable extending the risk participation election date and the risk participation deadline. However, the date of the Scheme Meetings remains Thursday 8 November 2018. The Company still intends to proceed to seek the sanction of this Court on Monday 12 November 2018 (I asked for that hearing to be advanced by one day to give the Court some flexibility over the hearing), to seek the sanction of the Bermuda scheme on Wednesday 14 November 2018, and to make the Scheme effective on the same day.

As I have indicated, that timetable is driven by a need to comply with the requirement of the SIC that the Restructuring should be completed within three months of the passing of the Shareholder Resolution on 27 August 2018. As will be recalled, the Company had known of the SIC’s conditions since early August, it held the SGM on 27 August 2018, and it announced the intention to proceed with parallel schemes in England and Bermuda on 30 August 2018. It is regrettable that the effect of the time taken to finalise the terms of the Restructuring and to circulate the PSL meant that the timetable for the convening and sanction hearings is now so tight that there is simply no room for manoeuvre if the SIC’s condition is to be met. My requests that the SIC be approached with a view to ascertaining whether it would be willing to extend the timetable to permit greater time for my decision, and for Scheme Creditors to digest and vote upon the Scheme were, however, met with the response that it had not been possible to make such approach to the SIC and evidence from local lawyers explaining how difficult that would be.

The result is a timetable under which Scheme Creditors have been presented with an extremely lengthy Explanatory Statement for a very complex Scheme at very short notice. As I have indicated, this is a matter which could be raised by Scheme Creditors at the sanction hearing.

As well as the position of Scheme Creditors, I also think that I should make some observations about the way in which the Scheme was brought before the Court. Although the hearing date of Friday 12 October 2018 for the convening hearing had been arranged with the Companies Court as early as 14 September 2018, the hearing bundles were not lodged with the Court until Wednesday 10 October 2018. Mr. Brough’s first witness statement ran to 59 pages and the accompanying documents to over 3,200 pages which filled 12 lever-arch files. The Explanatory Statement itself ran to over 260 closely typeset pages and it had 31 Appendices which included a number of the relevant draft documents necessary to give effect to the Restructuring.

More significantly, the Company’s Skeleton Argument, which is essential for prereading, was not filed until Thursday 11 October 2018, the day before the hearing. It ran to 49 pages and suggested, completely unrealistically for a matter of this complexity, that pre-reading and the convening hearing itself would each take half-aday.

In addition, the Company had booked a hearing in Bermuda for Monday 15 October 2018 and had made arrangements to make the Explanatory Statement available electronically to Scheme Creditors on Tuesday 16 October 2018. That timetable obviously pre-supposed that this Court would make the Order requested without further ado at the hearing on Friday 12 October 2018, or at the latest having considered the matter over the weekend.

The pressure that this approach created was compounded by evidence from Mr. Brough, the detail of which I have ordered should be kept confidential for the time being, but which I can nevertheless say warned of dire consequences for the Company and its creditors if the timetable set by the SIC was not met. Mr. Brough expressed considerable frustration for this state of affairs and laid the blame for it squarely at the door of the various creditor groups and institutions who (he said) had been engaged in interminable negotiations between themselves right up to the last minute, notwithstanding warnings from the Company and its advisers.

In my view this is simply not an appropriate way for the parties involved to approach the Court at the end of a restructuring which has been under discussion for over a year. As has been demonstrated on many occasions, flexibility and the ability to move swiftly when a genuine need arises is a particularly attractive and useful feature of the process for schemes of arrangement. The Companies Court will also always do what it can to accommodate the business needs of its users. However, it has been made crystal clear on numerous occasions that the Court is not a “rubber-stamp” for schemes of this (or any other) type. It is important that the Court is not taken for granted and its willingness to assist must not be abused.

That means that the Judge hearing a scheme case needs to be given adequate time for pre-reading and for the hearing, including time to consider what decision to make and to prepare a judgment. The parties involved in restructuring discussions must understand that they cannot run things down to the wire for their own benefit and without due regard for the proper process of the Court. Negotiations must be finalised in good time. The position should not be reached in which the Court is presented with a metaphorical “gun to the head” and the Judge is in effect told that if he does not comply with the company’s application immediately, he will be responsible for the collapse of the company because other creditors (and in this case the SIC) will be unwilling to extend their deadlines.

In practical terms, solicitors and counsel must ensure that the Court Listing Office is informed well in advance of the true extent of the matter so that a suitable Judge can be assigned and given a realistic amount of pre-reading time in his or her schedule. The hearing bundles and skeleton argument must be lodged well in advance and certainly no later than two clear days before the hearing as required by paragraph 21.77 of the Chancery Guide. Further steps should also not be arranged on a timetable that presumes that the Court will give its decision immediately.

Parties who do not assist in this way may find their hearings adjourned or taken out of the list until adequate time can be found. If that imperils a scheme, that will be the consequence of the acts and omissions of the parties themselves.

Having made those cautionary observations, I should end by expressing my gratitude to the counsel, solicitors and others who attended the hearings before me and who dealt efficiently and thoroughly with the issues that I raised.