On 12 January 2022, the English High Court granted Smile Telecoms Holdings Limited’s (“Smile” or the “Company”) application to convene a single meeting of plan creditors (the super senior creditors) to vote on the Company’s proposed restructuring plan (the “Restructuring Plan”). It is the first plan to use section 901C(4) of the Companies Act 2006 (“CA 2006”) to exclude other classes of creditors and shareholders from voting on the Restructuring Plan on the basis that they have no genuine economic interest in the Company.
Smile, together with its subsidiaries (the “Group”), provide internet and telecommunications services in Africa. Since 2016, Smile has been experiencing ongoing financial difficulty as a result of several macroeconomic and operational factors. The Group engaged in negotiations with lenders and the Company proposed a restructuring plan to facilitate the provision of urgent funding, which was sanctioned by the court on 30 March 2021 and concluded on 11 May 2021 (the “First Restructuring Plan”).1
Under the First Restructuring Plan, Smile’s majority shareholder, Al Nahla Technology Co. (“Al Nahla”), provided US$51 million via 966 CO. S.a r.l. (“966”) to Smile to stabilise the Group’s position and allow it to dispose of non-core assets in Tanzania, the Democratic Republic of Congo (the “DRC”), Uganda and Nigeria. This loan had a maturity date of 31 December 2021 (the “Super Senior Facility”).
Following the sanction of the First Restructuring Plan, the Group ran a sales process to dispose of its non-core assets. However, the offers received throughout the sales process were insufficient to meet the Company’s outstanding debts, which are as follows:
||Anticipated return under the Relevant Comparator Report
||Treatment under the Restructuring Plan
|US$63,620,000 Super Senior Facility
||Under the low case and high case scenarios, value breaks in the Super Senior Facility with a 42.0% and 62.3% return to the super senior creditors
||Injection of US$35,600,000 of additional funding by 966 and acquisition of control of the Company by 966 by issuance of new shares and conversion of existing share capital into deferred shares, redeemable for nominal consideration
"Senior Facilities", comprising:
• US$64,675,680.91 Exportkreditnämnden (Swedish export credit agency) supported facility agreement from the African Export-Import Bank, Access Bank plc, and Ecobank Nigeria
• US$59,000,000 Office National du Ducroire (Belgian export credit agency) supported facility
• US$20,000,000 term facility agreement with the Industrial Development Corporation of South Africa Limited (“IDC”)
• US$50,000,000 Development Bank of Southern Africa term facility
• US$50,000,000 facility comprising a US$14,300,000 Government Employees Pension Fund term facility and a US$35,700,000 convertible facility
• Ex gratia payment of US$10,000,000 to the senior lenders and US$1,200,000 to the agent creditor
• Full and unconditional release of all security created in relation to the Group under the Senior Facilities
• Disposal proceeds sharing deed, which will provide that the net proceeds from any actual or deemed realisation of value in the operating companies will be applied 72.5% to 966 and 27.5% pari passu and pro rata to the senior lenders
|US$40,000,000 IDC Preference Share Subscription Agreement (US$23,300,000 lent to date)
||• Ex gratia payment of US$10,000 to the preference shareholder
|Subordinated shareholder liabilities in respect of unsecured claims of those subordinated shareholder creditors against the Company
• Ex gratia payment of US$10,000 to the ordinary shareholders, to be allocated pro rata and pari passu
|Total outstanding amounts (including accrued but unpaid interest) as of 15 December 2021 is approximately US$400,894,206
The Company’s debts are subject to an intercreditor agreement which, amongst other things restricts the Company from selling the Group’s Nigerian business and assets unless the net proceeds of the disposal, together with other realisations, would be sufficient to repay lenders at par.
Since the First Restructuring Plan, the Company has faced a liquidity shortage and has engaged in ongoing discussions with its lenders. On 9 December 2021, 966 agreed to forbear from exercising its right to demand repayment of the Super Senior Facility until 31 March 2022 (the “966 Forbearance”). The 966 Forbearance would terminate if any senior lender commenced enforcement action or the Company did not launch the Restructuring Plan. Smile would have become cash flow insolvent as of 31 December 2021 if not for the 966 Forbearance.
On 6 January 2022, 966 provided a US$5 million emergency funding facility (“EFF”) to allow the Group to continue to operate. The EFF includes an event of default that will be triggered if the Restructuring Plan is not implemented. Smile claims that it needs to draw approximately US$2 million of the EFF in the first week of February 2022 to avoid insolvency and may need to make further drawdowns depending on when the terms of the proposed restructuring become effective.
The Restructuring Plan
The purpose of the Restructuring Plan is the injection of additional liquidity to avoid the Company entering into administration immediately and implementation of a restructuring of the Group’s indebtedness to facilitate the disposal of assets on a solvent basis.
Smile submitted that the relevant alternative to the Restructuring Plan is the immediate administration of the Company and subsequent liquidation of several of the Company’s operating subsidiaries.
Section 901C(4) of the Companies Act 2006
Section 901C(4) of the CA 2006 provides that, on an application, a plan company can seek an order of the court to exclude a class from voting if it can satisfy the court that the class of creditors have no genuine economic interest in the company.
This test is different to the test applicable to the court’s cross-class cram down power in section 901G(4) of the CA 2006. Section 901G(4) of the CA 2006 allows a dissenting creditor class to be bound by the plan proposal so long as no member of the dissenting class would be any worse off than in the relevant alternative and one class, that is “in the money”, votes in favour of the plan. The test in section 901C(4) of the CA 2006 sets a much higher bar than that in section 901G(4), as it requires that the company demonstrate that the compromised class of creditors has no genuine economic interest in the company, as opposed to no prospect of a better financial outcome under the relevant alternative than under the proposed restructuring plan.
You may review our legal updates on the Hurricane Energy restructuring plan here and the Amicus Finance restructuring plan here for a summary of the legal framework for the sanctioning of a Part 26A restructuring plan and the legal principles applicable to the use of the court’s cross-class cram down power.
Smile proposed that only one of eight classes of creditors and members, being the super senior lenders, should be entitled to vote on the Restructuring Plan on the basis that the value breaks in this class and no other class of creditors or members have a genuine economic interest in the Company. In the circumstances, Smile argued that it should be permitted to use the streamline procedure provided for pursuant to section 901C(4) which would avoid the time and cost of convening eight different classes of creditors and shareholders.
At the convening hearing, Smile submitted that based on robust valuation evidence, being the Relevant Comparator Report by Grant Thornton and the valuation provided by FBNQuest, it can be demonstrated that only the super senior lenders were “in the money” and submitted that it had “the best possible valuation evidence” given the protracted sales process undertaken by the Company.
Pursuant to the terms of the proposed restructuring, it is also proposed that the Company’s existing ordinary and preference shareholders will be varied by the conversion of the ordinary shares and preference shares into redeemable deferred shares which may be redeemed for nominal value. Further, new ordinary shares will be issued to 966 resulting it in owning 100% of the Company’s share capital.
At the convening hearing, Afreximbank sought to challenge the jurisdiction of the court to sanction a Restructuring Plan on such terms given that the Company is incorporated in Mauritius. Further, in the context of solvent schemes, it is generally considered that it is not possible for the court to sanction a scheme which involves an alteration of shareholder rights. However, Smile has argued that in the case of a Restructuring Plan between an insolvent company and its creditors and shareholders, the court does have jurisdiction to sanction a plan which proposes to alter the rights of shareholders. It has also advised the court that it will provide evidence to it at the sanction hearing that the Restructuring Plan (including the terms to amend shareholder rights), will be recognised in Mauritius.
This issue will be considered further by the court at the sanction hearing. However, in the event that Smile is successful in disenfranchising the company’s equity pursuant to the proposed Restructuring Plan, this outcome would further demonstrate the inherent flexibility of the new Restructuring Plan and vast array of options now available to distressed companies to enable them to be rescued on a going concern basis.
The court made an order to convene a single class of Smile’s super senior creditors as it was satisfied that only this class of creditors had a genuine economic interest in the Company. In coming to his decision, Miles J noted that “senior lenders are well out of the money. This does not appear to be a marginal case”. The court was also satisfied that it had jurisdiction and the Company had sufficient connection with England.
Miles J made reference to the obiter comments of Snowden J in the Virgin Active case2 and said that in considering whether a creditor had a genuine economic interest in the company the court must consider the relevant alternative and should address the question by “applying the civil standard of balance of probabilities”.
Accordingly, none of the Company’s other creditors or members have been invited to vote on the Restructuring Plan. No senior lenders or other parties appeared before the court to challenge the application, however during the course of the hearing the lawyers for Afreximbank made it known “that Afreximbank says that it does not accept that it was out of the money and that it made its position clear to the company, however Afreximbank has not put in any evidence contradicting that adduced by the company”.
In making the order, Miles J noted the following:
- The senior lenders had accepted the appointment of FBNQuest for the preparation of the valuation. The valuation was provided to all interested parties that agreed to sign an NDA and the valuation was subsequently reviewed by PwC on behalf of the senior lenders. Further, the sales process was undertaken by an experienced bank and monitored by both Grant Thornton (on behalf of the senior lenders) and PwC.
- The valuation has been thoroughly “interrogated and explored” by the senior lenders and their advisors at length.
- Based on the estimated outcome statement, the senior lenders are clearly out of the money. Earlier versions of the estimated outcome statement were provided to the senior lenders and their advisers and they have had sufficient time to consider the contents of the estimated outcome statement.
- The Company had in fact provided the “best valuation of the assets”, noting that in the estimated outcome statement the auditor applied a valuation discount within the normal range for a distressed sale and supplemented this valuation evidence with the actual marketing and sales process evidence to date.
The scheme meeting of the super senior class is to be held virtually on 10 February 2022 and the sanction hearing is listed for 17 February 2022. A more detailed analysis of the plan will follow once the convening judgment has been handed down.
1) Re Smile Telecoms Holdings Ltd  EWHC 395 (Ch) (convening); Re Smile Telecoms Holdings Ltd  EWHC 685 (Ch) (sanction); Re Smile Telecoms Holdings Ltd  EWHC 933 (Ch) (final sanction)
2) In the matter of Virgin Active Holdings Limited and others  EWHC 1246 (Ch) at 134 and 239.