Sailing into the sunset—cruise port operator given go-head for scheme of arrangement (Re Port Finance Investment Ltd)

Sailing into the sunset—cruise port operator given go-head for scheme of arrangement (Re Port Finance Investment Ltd)

This was an application to convene a meeting of creditors for the purposes of considering, and if thought fit, approving a scheme of arrangement under Part 26 of the Companies Act 2006 (CA 2006). The hearing had been twice adjourned to allow the scheme company to provide further evidence on various aspects of the restructuring plan, including the proposal to pay the fees of advisors to certain scheme creditors. The court needed to ensure that the proposal to pay such fees did not amount to disguised consideration. Upon provision of the further evidence, Mr Justice Snowden accepted this was not the case and accordingly convened a meeting of a single class of the scheme creditors. Written by Roseanna Darcy, barrister, at South Square Chambers.

Re Port Finance Investment Ltd [2021] EWHC 378 (Ch)

 What are the practical implications of this case?

Snowden J confirmed that the central task for the court at a convening hearing is to determine whether to order a meeting of one of more different classes of creditors, and to give any necessary directions. While a court could consider matters going to the existence of the court’s jurisdiction over the scheme company and its creditors, it should not consider the merits of the scheme or any of the factors relevant to the exercise of the court’s discretionary power to sanction the scheme, save perhaps to indicate any obvious ‘roadblocks’ (Re ColourOz Investment LLC [2020] EWHC 1864 (Ch) applied).

The judgment also provides an example of the court’s willingness to adjourn a convening hearing until it has the necessary evidence before it to confirm class composition. It provides a useful analysis on how the payment of advisory fees should be viewed and highlights the importance of ensuring such payments do not amount to disguised consideration.

What was the background?

The wider group to which the scheme company belonged was a leading global cruise port operator. As a result of the coronavirus (COVID-19) pandemic and the material adverse effect this had on the cruise industry, the group’s finances had been severely impacted with revenue declining by 53% compared to the same period in the preceding year.

There was uncertainty about the continued effect of coronavirus which made the group’s revenue stream unclear.

The group’s primary indebtedness included unsecured senior notes due on 14 November 2021 with an aggregate principal amount of $US 250m pursuant to the governing law of New York (the existing notes). Interest was payable semi-annually in arrears on 14 May and 14 November of each year prior to their maturity.

The existing notes were guaranteed by the scheme company and Ege Liman İşletmeleri A.S (a subsidiary of the original issuer).

Given the continued uncertainty caused by coronavirus, the group concluded that in order to maintain its liquidity position it would be necessary to defer the interest payment on the existing notes which were to fall due. The group also doubted its ability to repay the existing notes in full on maturity.

The purpose of the scheme was therefore to release and discharge the existing notes. By way of consideration, the scheme creditors were to receive new notes to be issued by a newly incorporated holding company with an extended maturity date. Scheme creditors could elect to receive a cash option consideration in lieu of part or all of their entitlement to the new notes through a modified reverse Dutch auction procedure enabling 

scheme creditors to indicate the amount of their new notes entitlement they wished to tender and their offer price.

A consent fee was also offered to scheme creditors for those who voted in favour of the scheme by the early bird deadline.

Additionally, the scheme company had agreed to pay the fees of the legal and financial advisors to an ad hoc group of scheme creditors, although this was provided for in a separate agreement rather than through the scheme itself.

 What did the court decide?

Notice

At the first hearing of the matter, the court considered that insufficient notice of the scheme had been given to the scheme creditors, which in this case amounted to 16 days prior to the hearing.

It was clear from the authorities that whether there was adequate notice of a convening hearing was an intensely fact-sensitive matter. Here, while it was accepted there was some urgency on the part of the scheme company due to the upcoming interest payment date and maturity of the existing notes, there was still considerable time before those events occurred. Also, while there had been some engagement with scheme creditors in January 2021 regarding the intention of proposing the scheme, there was no consultation with the general body of creditors.

Additionally, it was considered that the scheme raised a number of issues that were not entirely straight forward, including the proposals for payment of the advisors’ fees of some of the scheme creditors. However, it was accepted that this did not warrant a delay to the convening hearing, and in line with Re Swissport Fuelling Ltd [2020] EWHC 1499 (Ch), the scheme creditors would be entitled to raise any relevant issues at the sanction hearing instead.

Jurisdiction

The three questions that the court needed to address were whether:

  • the scheme company is a company for the purposes of CA 2006,Pt 26
  • there was a ‘compromise of arrangement…between a company and…its creditors’ within CA 2006, Pt 26, and
  • it is permissible to vary rights that scheme creditors have against persons other than the scheme company

Prior to the expiry of the transitional period for the departure of the UK from the EU, the practice of the court was also to consider whether it had jurisdiction pursuant to the Recast Jurisdiction and Judgments Regulation (EU 2012/1215). However, that Regulation no longer applies as the current proceedings were issued after 31 December 2020.

As the scheme company was incorporated in England, the court was satisfied that this amounted to a company for the purposes of CA 2006, Pt 26.

As to whether there was a compromise or arrangement between the scheme and its creditors, this was a matter of New York law for which there was no current evidence. As that evidence would be available at sanction, Snowden J was prepared to determine the issue then.

On variation of rights against third parties, the scheme provided for the release of scheme creditors’ rights against the original issuer and guarantor. It was settled law under CA 2006, Pt 26 that a scheme could include a mechanism providing for the release or variation of creditors’ rights against third parties such as guarantors (as per Re Lehman Brothers International (Europe) (in administration) (No 2) [2009] EWCA Civ 1161).

However, it also had to be considered that previously the scheme company had no liabilities to the scheme creditors that needed to be compromised. The scheme company had been created solely to allow the 

scheme to occur. Similar techniques had previously occurred (for example in Re AI Scheme Ltd [2015] EWHC 1233 (Ch)).

Snowden J concluded that in the circumstances of the case, the fact the scheme company had only recently been incorporated with a view to invoking the scheme jurisdiction was not a reason to decline to sanction the scheme, especially because the scheme appeared to be in the interests of the group’s creditors.

 Composition

Following the well-established test of class creditors set out in Sovereign Life Assurance v Dodd [1892] 2 QB 573 it was proposed and accepted that there should be a single class of scheme creditors as they all represented holders of the existing notes. The three potential issues that could have fractured the class included the consent fee, the cash option, and the payment of the advisors’ fees.

In this instance the consent fee was available to all noteholders. However, this was not a complete answer because at the point of voting, some creditors would have accepted the consent fee prior to the early bird deadline, and others would not have.

Therefore, as per Re Primacom Holding GmbH [2013] BCC 201, the mere fact that all creditors had the opportunity to qualify for a consent fee was not determinate of the class question. The question of whether the amount of the consent fee induced creditors to voice in favour of a scheme they might otherwise reject also had to be considered. This required the consent fee (being 1% of the principal value under the existing notes) to be assessed in light of the predicted returns to all creditors under the scheme and in the absence of the scheme.

As there was not a significant difference between these two positions, the consent fee did not fracture the class.

The cash option was also available to all noteholders. Although the amount received might be different between creditors, this was premised on a commercial decision of each creditor. However, this could also create a distinction between creditors who had exercised the cash option and those who had not. The appropriate solution was to allow any creditor to raise concerns on this at the sanction hearing.

On the payment of ad hoc group’s advisors’ fees, it was acknowledged that this had become a feature of schemes in recent years. However, it was important to ensure that the payment did not amount to a disguised part of the consideration offered under the scheme (Re Noble Group Ltd (convening) [2018] EWHC 2911 (Ch). While Snowden J was satisfied that the payment of the legal adviser’s fees was not disguised consideration and so did not fracture the class, he did express concern over the proposal to pay the fees of a financial adviser which included a success fee. This meant the fee did not merely amount to remuneration but was conditional on the scheme being sanctioned.

There was also a concern that the financial adviser was planning to carry out due diligence for the benefit of certain noteholders, but not others. Following further advice from the scheme company, Snowden J was satisfied with the proposal. It became clear there was no intention for the financial adviser to conduct a private due diligence process. There were also assurances that other noteholders could join the ad hoc group, and in any event, any additional information provided to members of the ad hoc group would be provided to all noteholders.

The further evidence also made it clear that the success fee was not intended to relieve the members of the ad hoc group from any actual liability to pay a fee to the financial advisor contingent upon the scheme being sanctioned and was not designed as disguised consideration.

The court was therefore satisfied it was appropriate to convene a meeting with a single class of scheme creditors.

 Case details

  • Court: Business and Property Courts of England and Wales, Insolvency and Companies List (ChD)
  • Judge: Snowden J
  • Date of judgment: 23 February 2021

Roseanna Darcy is a barrister at South Square Chambers, and a member of LexisPSL’s Case Analysis Expert Panels. If you have any questions about membership of these panels, please contact caseanalysiscommissioning@lexisnexis.co.uk.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.