Mytravel Group Plc, Re Companies Act 1985

At the convening stage of a scheme, the court may determine a jurisdictional issue which would make later sanction impossible, but should not decide the scheme’s fairness. A reconstruction under section 427 of the Companies Act 1985 requires substantially the same business to continue through substantially the same shareholders. A transfer of an insolvent company’s undertaking to a new company whose shares are allotted predominantly to creditors is therefore not a reconstruction where the original shareholders retain only a nominal interest. For class and consultation purposes, creditors with no real economic interest in the company need not be included. That interest is assessed by reference to the realistic insolvency alternative, rather than theoretical contractual rights or speculative bargaining value.

Mytravel Group Plc applied under section 425 of the Companies Act 1985 for directions convening meetings to consider a scheme of arrangement. The proposed scheme transferred the company’s undertaking and assets to a new company. Existing shareholders were to receive 4 per cent of the new company’s shares, while converting creditors were to receive 94 per cent. The subordinated convertible bondholders were left behind and offered a separate exchange for up to 2 per cent of the new company.

The bondholders challenged the use of section 427 and argued that they had an economic interest requiring consultation. The court therefore considered whether the scheme was a reconstruction and, alternatively, whether the bondholders had a real economic interest in the company.

1. Stage of proceedings. The court adopted the approach in In the matter of Telewest Communications PLC [2004] EWCH 924 (Ch.). At the convening stage the court may determine matters going to its jurisdiction to sanction the scheme, including a point that the scheme cannot qualify under section 427. It should not determine fairness, which belongs to the sanction hearing.
2. Meaning of reconstruction. The authorities, particularly Re South African Supply and Cold Storage Co [1904] 2 Ch. 268 and Brooklands Selangor Holdings Limited v Inland Revenue Commissioners [1970] 1 WLR 429, establish that reconstruction is a commercial concept but ordinarily requires substantially the same business to be carried on by substantially the same persons. For this purpose the relevant persons are substantially the shareholders or corporators, not creditors who acquire an interest because the company is insolvent.
3. The proposed allocation, under which the existing shareholders collectively retained only 4 per cent of Newco, did not satisfy that requirement. The scheme could not be sanctioned under section 427 as propounded. Since the section 427 order was essential, there was no point convening meetings and the application was refused.
4. Bondholders’ economic interest. If the section 427 issue had been decided in the company’s favour, the bondholders would not have required consultation. The court followed Re Tea Corporation [1904] 1 Ch 12: a class with no real interest in the assets need not have its votes taken into account.
5. The relevant comparison was a winding up because the evidence showed that, absent a restructuring, the company’s licences would probably be revoked and insolvency would follow. Theoretical enforceability, market trading value and possible consensual bargaining value did not establish an economic interest in the company. On the evidence, the subordinated bondholders had no serious prospect of recovery and their economic interest was nil.

First-instance decision. No prior appellate decision is stated in the judgment.