In sanctioning a second Restructuring Plan for Smile Telecoms Holdings Limited (“Smile”), the English Court has once again broken ground with respect to the new, post-CIGA insolvency landscape, providing useful guidance for debtors, creditors and solicitors alike. In this article, Pallas Partners LLP’s Tracey Dovaston, Nick Turvey and Henrietta Tonkin share their key takeaways, having acted for Smile’s majority shareholders and senior lender in respect of both Smile Restructuring Plans.
S 901 C(4)
As the first of its kind to consider an application under section 901C(4) to exclude a class from voting on the plan, Miles J’s judgment at the convening stage provided helpful pointers on the test the Court will apply in granting such Orders:
- The effect of such Orders is – as confirmed by Lord Snowden – “draconian” for out-of-the-money creditors: it amounts to a finding, at a relatively early stage, that they should have no further formal approval role to play in the Restructuring Plan process.
- In those circumstances, and notwithstanding the lack of any formal opposition in Smile’s case, it is unsurprising that the Court felt it necessary to scrutinise and test the company’s evidence in a fully-reasoned judgment.
- Future debtors considering whether to go down the route of 901C(4) (as opposed to seeking a “simple” cross-class cramdown) should go into the process with eyes wide-open: anything less than substantial evidence as to valuation, notice given to creditors, and relevant alternatives will likely be met with increased scrutiny.
More generally, the approach adopted by both Miles J and Lord Snowden throughout the second Restructuring Plan is instructive for creditors, debtors, and their counsel alike:
- Although Smile’s application was effectively unopposed at both the convening and sanction hearings, the Court nevertheless paid careful attention to ensure that all relevant evidential and procedural burdens were met. In line with Restructuring Plan caselaw to date (including Smile’s first Restructuring Plan (the “First RP”), which was sanctioned at the second attempt), the Court is not in the business of “rubber-stamping” debtors’ proposals.
- Conversely, creditors wishing to oppose a debtor’s proposals should be careful to ensure that any such opposition is both (i) evidenced, and (ii) put forward in a timely manner.
- Here, Smile faced a degree of resistance, albeit the opposition of the “lead” dissenting creditor (Afrexim) in this case took the form of letter-writing. Whilst the Court took account of the points made by Afrexim’s solicitors, it is a general rule of contentious insolvency that the position of an opposing party will be improved if it is willing to make and defend its arguments directly to the Court – particularly where, as in this case, the debtor has shown a willingness to defend and explain substantive evidence to the contrary.
- Echoing the views of Justice Hildyard in Stronghold, and more recently Justice Mann in Provident (where the FCA put in a letter of opposition), Lord Snowden stressed that creditors and members “must stop shouting from the side-lines and step up to the plate”.
- Moreover, the timing and substance of creditor opposition is important and subject-specific:
- The Court will take a hard line as to when issues are raised: creditors and members cannot just pick and choose a time to raise issues, as doing so makes life difficult for those proposing the plan and, worse still, for the Court.
- Whilst the plan company is under a duty to present an honest view, taking account of opposing interests, it is not required actively to argue against itself, particularly where the Court has been shown evidence that the company’s own experts have considered and disagreed with contrary arguments raised solely in correspondence. Still less is the Court under a duty to “descend into the fray” or “engage in some sort of vicarious challenge” to the company’s evidence.
- In cases where alleged valuation disputes exist, they likely should be raised before the convening hearing, and certainly before any application is determined under s. 901C(4) to exclude the opposing creditor from voting. Delay in raising such points is not fatal, given the Court’s broad discretion as to sanctioning. But a creditor presenting valuation evidence for the first time at the sanctioning stage, to challenge the exercise of the Court’s powers under s. 901C(4), may well face an uphill battle, particularly if the Court has already determined at convening that adequate notice in the practice statement letter has been given to creditors.
- By contrast, the separate questions of the existence and exercise of the Court’s jurisdiction in international cases should probably in most cases be reserved for the sanction hearing, bearing in mind any opposition should still be aired with sufficient notice, including because the Court will conduct a prima facie analysis as to jurisdictional “roadblocks” at the convening hearing.
The Court will be careful to draw a clear distinction between the existence of jurisdiction in the strict sense and the exercise of jurisdiction (consistent with the approach taken by Lord Collins in Re Drax Holdings Limited).
On the question of whether the plan constituted a ‘compromise or arrangement’ in the relevant sense, Lord Snowden noted that what was required was some element of “give and take” between the creditors and lenders who were bound by the plan. The Court’s jurisdiction to entertain the plan on the basis that it amounted to a ‘compromise or arrangement’ could not simply rely on the fact that it shared a number of features with the First RP in Q1 2021.
In addition, where the Restructuring Plan proposes the alteration of a foreign company’s capital structure, questions of recognition will be subject to meticulous scrutiny:
- At the sanction hearing, Lord Snowden paid careful attention to ensure any English sanction Order would not be contrary to the laws of the plan company’s place of incorporation, Mauritius, and would be deemed to have ‘substantial effect’, particularly in circumstances where there was no parallel scheme or plan for Smile in Mauritius.
- Lord Snowden acknowledged that this should not cause him to decline jurisdiction to sanction the plan, so long as he was satisfied that proposed alterations to the constitution and share capital of the overseas company can be satisfactorily achieved in the overseas jurisdiction in compliance with local laws and accepted by local courts, without any need for a parallel scheme or plan.
- In this case, a Mauritian expert opinion was required to satisfy the court that the proposed mechanism (the grant of a power of attorney to effect the necessary amendments) was a suitable bridge to ensure the restructuring documents would be given effect in Mauritius.
Smile is one of the largest telecoms companies in sub-Saharan Africa, with operations in Nigeria, Tanzania, Uganda and the DRC. Incorporated in Mauritius, it has historically been financed through debt and equity investment by a group of companies referred to as “Al-Nahla”, and lending from numerous African banks and funds.
Following a period of financial difficulty, including because of Nigerian currency issues and a lack of funding from its bank lenders, Smile successfully sought the sanctioning of an English Restructuring Plan in early 2021. In broad terms, the First RP allowed Smile to secure urgent funding from a new super-senior lender (referred to as “966”) to attempt to execute an accelerated M&A process for its subsidiary operating companies and their assets. The English Court sanctioned that First RP, notwithstanding the opposition of a single lender in Smile’s senior lender group, the Government Employees Pension Fund (the “GEPF”) represented by its agent the Public Investment Corporation (the “PIC”). The PIC (and the class as a whole, since the lender held a blocking stake) was “crammed-down”, including because the lender had voted for a collateral purpose.
The Second RP – Application and Convening
The resulting M&A process, set against the background of extended Covid-19 economic difficulties, failed to generate adequate interest in Smile’s assets. As a result, Smile launched a second Restructuring Plan (the “Second RP”) in December 2021.
Smile argued that its capital and debt structure was unsustainable, and that it required both (i) an injection of new money, and (ii) a compromise of its debt obligations. If successful, the Second RP would allow the provision of additional funding from 966, a transfer of Smile’s equity to 966, and the discharge of Smile’s lesser-ranking debt, in return for certain ex gratia payments to senior lenders. It was a condition of further funding from 966 that the Second RP be sanctioned and implemented.
Importantly, Smile relied on evidence that all but the super-senior debt (966) was now “out of the money”. As such, Smile contended that it should require only 966’s consent to effect the Second RP.
At the 12 February 2022 convening hearing, the Court approved Smile’s proposals and convened meetings to vote on the proposed Second RP. For the first time, and following a long and careful judgment from Miles J, the Court also granted Smile’s application for an Order under section 901C(4) of the Companies Act 2006: only a single class of creditors (the super-senior lender – 966) was convened to vote.
Although one of Smile’s senior bank lenders (Afrexim) had raised informal opposition in correspondence, the Court was satisfied that Smile had demonstrated (i) that the English Court had jurisdiction to convene the meetings; and (ii) no creditor other than 966 had a “genuine economic interest in the company”. In other words: in the relevant alternative (liquidation), the Court was satisfied that no other party would recover anything.
On one view, this was unsurprising: Smile’s application faced no formal opposition, and Miles J concluded that the evidence demonstrated that this was not even a “marginal case” as to where the value broke. Nevertheless, and perhaps in light of the fact that 901C(4) had not previously been exercised, the Court was meticulous in its analysis as to why Smile’s application should succeed.
The Second RP – Sanction
966 voted in favour of the Second RP at the sole creditor meeting. Shortly before the scheduled convening hearing, however, Afrexim produced a valuation report (in correspondence with Smile’s solicitors) contesting Smile’s evidence that the senior lenders were “out of the money”. As a result, the sanction hearing was deferred by 9 days to 10 March 2022.
In the event, Afrexim did not appear and was not represented at the sanction hearing. Smile and 966 each supported the sanctioning application, whilst the sole senior lender/shareholder to appear (Al Nahla Technology Co) was neutral as to Smile’s application for sanctioning.
Appearing as a Judge in the High Court Chancery Division, Lord Snowden ultimately sanctioned the Second RP on 30 March 2022.
Tracey Dovaston, Nick Turvey and Henrietta Tonkin of Pallas Partners LLP acted for Al Nahla Technology Co and Strong Techno Ventures Ltd, instructing Andrew Thornton QC (Erskine Chambers). Smile was represented by Felicity Toube QC (South Square Chambers), instructed by Kirkland & Ellis. 966 was represented by Tom Smith QC (South Square Chambers), instructed by Greenberg Traurig. Grant Thornton acted as financial adviser to Smile. Albert Momdijan of Sokotra Capital advised in his capacity as the Chair of the Audit Committee and Member of the Restructuring Committee of Smile. Raihan Shaikh-Khaleel of Swinton Capital acted as Restructuring Adviser to Al-Nahla and board-appointed representative.