Telewest Communications Plc , Re

At the meeting-convening stage of a scheme under section 425 of the Companies Act 1985, the court determines jurisdiction, principally whether creditor classes are properly constituted. It does not decide the commercial fairness of the scheme, which is for the sanction hearing.

Classes depend on the legal rights affected by the scheme, assessed in the realistic alternative of insolvent liquidation, rather than on divergent commercial interests. Currency conversion at the liquidation valuation date is integral to pari passu distribution. A different conversion basis therefore departs from that right, but it requires separate meetings only if it makes creditors’ rights so dissimilar that they cannot sensibly consult together. A contextual and broad assessment remains necessary.

Telewest Communications Plc and its Jersey subsidiary applied under section 425(1) of the Companies Act 1985 for leave to convene creditor meetings to consider inter-related schemes of arrangement. The proposed financial restructuring would cancel substantial unsecured bond debt and exchange it for shares in a new holding company.

The schemes used an average sterling-to-dollar exchange rate to calculate the allocation of new shares. A group of sterling bondholders supported restructuring but contended that a spot rate on the scheme valuation date should be used. Alternatively, they sought separate meetings for sterling and dollar bondholders. The court also considered several other possible class issues and a proposed declaration appointing authorised representatives for a United States bankruptcy application.

1. The applications were granted. The court gave Telewest and Telewest Jersey leave to convene the proposed creditor meetings. It also declared that the nominated individuals had been duly appointed as authorised representatives for the proposed United States application.

2. At the convening stage, the court’s task is to decide issues bearing on its jurisdiction to sanction a scheme, especially class composition. It is not to determine the scheme’s merits or fairness in advance of the sanction hearing. Accordingly, the alleged unfairness of the Average Exchange Rate was not a basis to refuse leave: see Re Savoy Hotel Ltd [1981] Ch 351.

3. Applying the class principles in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 and Re Hawk Insurance Co Ltd [2001] 2 BCLC 480, the relevant comparison was between legal rights, not personal or commercial interests. Since Telewest was heavily insolvent, those rights were the rights in an insolvent liquidation. A separate meeting is required only where the rights altered or replaced by the scheme are so dissimilar that the creditors cannot sensibly consult together for their common interest.

4. Conversion of foreign-currency claims at the liquidation valuation date is an essential part of a genuinely pari passu distribution. A scheme which chooses a valuation date but uses a different date or basis for currency conversion departs from that right. The court accepted that the Average Exchange Rate therefore affected the relative distributions between sterling and dollar bondholders.

5. That departure did not, however, make the bondholders’ rights sufficiently dissimilar. All were unsecured creditors with presently payable debts, all would surrender their claims for shares, and the conversion rate applied uniformly to every sterling claim. The likely difference in allocation was material but, in the context of a restructuring involving bonds worth about $3.5 billion, did not justify treating the scheme as separate linked arrangements. Any overall unfairness remained for the sanction hearing.

6. The remaining matters did not require separate classes. A wholly owned subsidiary creditor could vote with the general creditor class where its votes were cast according to its own creditors’ wishes. Shareholder rights, voting agreements, releases, committee expenses and ancillary-claim procedures did not alter bondholders’ relevant scheme rights on the evidence. A voting agreement would raise a serious class issue only if the agreeing creditor received unequal benefits for its support.

7. The court made the authorised-representative declaration under its general declaratory jurisdiction. Section 425(1) of the Companies Act 1985 did not necessarily imply a wider power beyond directing how meetings were to be summoned.

not stated in the judgment.