Smile Telecoms Holdings Limited (the company), a company incorporated in Mauritius but whose COMI is in England, is the holding company of a group of internet and telecommunications businesses operating across Tanzania, Nigeria, Uganda, and the DRC. Under the company’s restructuring plan sanctioned in 2021 (RP1), there was an injection of US$62m super senior funding by 966 CO. S.à r.l. (the Super Senior Lender). The new money was advanced partly to implement a solvent disposal of the Group’s operations in Tanzania, DRC and Uganda, and partly to implement a business plan for the group's Nigerian business with a view to it being sold in the medium term in an orderly manner. The sanction of RP1 last year saw one of the first uses of the new cross-class cram-down mechanism.
Unfortunately the company has had limited success with its solvent disposals programme. That, combined with continued difficult trading conditions and the maturity of the super senior funding provided as part of RP1 means that the company requires a new balance sheet restructuring to allow the sales to continue on a solvent basis.
The convening hearing for a second Part 26A restructuring plan (RP2) took place on 12 January 2022 and is the first to include an application under section 901C(4) of the Companies Act 2006 to exclude a class from voting on the restructuring plan. At the hearing the company argued that only one class (comprising the Super Senior Lender) out of eight classes of creditors and members should be entitled to vote on the proposed plan as all other classes, including the secured senior lenders and all other junior stakeholders, had no economic interest in the company, with value breaking within the Super Senior debt in the event of the relevant alternative which was an insolvency of the company and its subsidiaries.
The restructuring plans that the courts considered in 2021 focussed largely on the new cross-class cramdown tool under section 901G(4). This power uses the “no worse off” test to enable dissenting creditor classes to be “crammed down” or bound by a restructuring plan provided that at least one class votes in favour of the plan and none of the members of the dissenting class would be “any worse off than they would be in the event of the relevant alternative”.
Section 901C(3) provides that “every creditor or member of the company whose rights are affected by the compromise or arrangement must be permitted to participate in a meeting ordered to be summoned [by the court]” However, under section 901C(4) a company proposing a restructuring plan can ask the court to exclude a class from the voting arrangements where “the court is satisfied that none of the members of that class has a genuine economic interest in the company.” This goes further than the cross class cram-down and removes the opportunity for the affected class to vote on the proposals at all. There is a higher threshold to meet in order to satisfy the test in section 901C(4) as compared to section 901G(4), namely the company must demonstrate that the relevant class has a complete absence of economic interest in the company, rather than satisfying the court that the creditor is no worse off under the plan than under the relevant alternative.
Ultimately, the question comes down to valuation and whether or not the company can demonstrate that a class is entirely out of the money. To support the application, the evidence provided in court by the company included a valuation by FBNQuest (albeit on a confidential basis only for the court and restructuring plan participants subject to confidentiality agreements) of the Nigerian business (considered to be the only asset in the group with significant value) which showed that on a best-case analysis proceeds would be insufficient to repay the Super Senior Lender in full. Without the restructuring plan the assets would be sold through an insolvency process, generating proceeds which would only repay the Super Senior Lender, under the payments waterfall in the Intercreditor Agreement, with no surplus from that business or the other non-core assets remaining to repay Senior Lenders or more junior creditors. This was also corroborated by an Estimated Outcome Statement (EOS) produced by Grant Thornton UK LLP.
In his judgement, Mr Justice Miles, referring on obiter comments from Snowden J in In the matter of Virgin Active Holdings Limited and others  EWHC 1246 (Ch), said that in considering whether a creditor had a genuine economic interest in the company the court must look at the “relevant alternative” for the company if the plan was not sanctioned, and the court should address the question by applying the civil standard of balance of probabilities.
The court noted that in relation to a section 901C(4) application it could decide that the evidence was not sufficiently complete or satisfactory to enable the court to reach a proper view for example where inadequate notice of the application had been given to other stakeholders or where objections were raised by creditors which the court considered required further time or investigation. However, the judgement confirmed that where the court was satisfied by the evidence that none of the members of the relevant class has a genuine economic interest, then it was open to the court to conclude there is no purpose to requiring any meeting of that class. Hence the court proceeded to grant an order under section 901C(4), directing that the Super Senior Lender should be the only voting class.
In granting the section 901C(4) order, Mr Justice Miles confirmed that he was satisfied that the Super Senior Lenders was the only class of creditor with any genuine interest in the company. He confirmed that in reaching this conclusion he had taken account of the following factors:
- the valuation by a reputable valuer (whose appointment had been accepted by the Senior Lenders), which had been provided to the relevant parties and had been interrogated by the Senior Lenders,
- the EOS, carried out by a reputable professional firm, had been reviewed by the Senior Lenders, and showed the Senior Lenders as being clearly out of the money,
- the discount applied by Grant Thornton UK LLP in the EOS was within the normal range for distressed sales,
- there had been an actual M&A process carried out in relation to the assets by an experienced party, which had led to offers for the assets demonstrating that the value broke well within in the Super Senior debt and that M&A process had been monitored by PwC on behalf of the Senior Lenders, and
- all stakeholders had been given proper notice of the convening hearing including the section 901C(4) application and none had sought to adduce contrary evidence at the hearing.
The sanction hearing is scheduled for Thursday 17 February 2022. If RP2 is sanctioned, stakeholders other than the Super Senior Lender will see their debts and shareholder rights compromised in full (although certain ex gratia payments will be made) without having had an opportunity to vote on the proposals. While stakeholders may still be able to make representations at that sanction hearing, they have lost the right to “vote with their feet” by voting against the proposals and they may face an uphill battle if they want to oppose RP2 at that stage.
Yesterday’s decision demonstrates that the court is prepared to use section 901C(4). It is a powerful tool which can be used to disenfranchise creditor and member classes from the start of the restructuring plan process. In this case that will result in a single class meeting, with a single creditor in that class. If there is a clear case on valuation, a company considering a restructuring plan may now be encouraged to try section 901C(4) as it gives creditors and members less time to organise a challenge on valuation than if such matters are tested in the context of a cram-down application at sanction. However, this was a situation where there was clear and supported evidence that the only creditor with a continuing economic interest in the company was the Super Senior Lender. Other cases where the valuation evidence is less compelling, or where there is a credible challenge to the plan company’s valuation evidence, may be less clear cut under section 901C(4) and the courts may prefer to look to the cross-class cram down mechanism instead. Whichever route is adopted, the battleground of valuation evidence and the relevant alternative will still remain at the heart of such cases.
Hogan Lovells London Restructuring team acted on 5 of the 10 Restructuring Plans which were heard in 2021 including Virgin Active, NCP and Smile Telecoms.