Bluebrook Ltd, Re

A company may select the creditors with whom it enters a scheme and need not include creditors whose rights are unaffected or who have no real economic interest. The court may investigate that economic interest; a merely theoretical interest or bargaining opportunity is insufficient. Creditors who are not bound may nevertheless object where the scheme unfairly prejudices them, but unfairness must be established. In an insolvency, directors must consider creditors as a whole. That duty does not require them to negotiate a return for subordinated creditors who are separately protecting their own interests and have no economic interest in the assets. A restructuring may constitute a compromise or arrangement where the scheme forms part of wider transactions providing substituted claims and asset transfers. The court must assess the scheme on its merits, not refuse sanction merely to force further negotiations.

Bluebrook Ltd, IMO (UK) Ltd and Spirecove Ltd sought sanction of schemes of arrangement with their Senior Lenders as part of a debt restructuring. The scheme creditors approved the schemes by substantial statutory majorities. The Mezzanine Lenders were not included because their legal rights were not altered and the companies considered that they had no economic interest in the assets.

The Mezzanine Lenders objected that the restructuring transferred value to the Senior Lenders, that the directors had failed to protect the interests of creditors, and that the schemes were not a compromise or arrangement within the Companies Act 2006. The central issues were whether the Mezzanine Lenders had a real economic interest, whether the schemes operated unfairly towards them, and whether the court should refuse sanction.

The court held that it was right to sanction the three schemes, or at least not to refuse sanction on the objections advanced by the Mezzanine Lenders.

1. Choice of creditors and economic interest. A company may select the creditors with whom it wishes to compromise. It need not include creditors whose rights are untouched. A class with no real economic interest in the company’s assets need not be consulted. The court may determine that issue on the ordinary civil standard. A theoretical or fanciful interest, or the mere possibility of obtaining a negotiating advantage, is insufficient. This was supported by Sea Assets Ltd v Pereroan etc Garuda Indonesia [2001] EWCA Civ 1869, In re British & Commonwealth Holdings plc [1992] 1 WLR 672, In re Tea Corporation Ltd [1904] 1 Ch 12 and In re MyTravel Group plc [2005] 2 BCLC 123.
2. Valuation and fairness. A going-concern valuation was the appropriate basis for assessing fairness. The PwC, Rothschild and King Sturge exercises consistently valued the business below the Senior Debt. The LEK evidence, based substantially on a mechanical Monte Carlo simulation, did not provide sufficiently reliable evidence of an economic interest or demonstrate that the Senior Lenders were receiving an unfair bargain.
3. Directors’ duties. Directors of an insolvent company must have regard to creditors as a whole. On these facts, however, that did not oblige the boards to negotiate a return for the Mezzanine Lenders. They were separately negotiating for themselves, had not asked the boards to negotiate on their behalf, and had no demonstrated economic interest. The group was technically insolvent, in default and in need of restructuring, so a threat to continue trading was not a realistic bargaining position. Re Pantone 485 Ltd [2002] BCLC 266 and Sydlow Pty Ltd v Melwren Pty Ltd (1994) 13 ACSR 144 did not require a different result.
4. Compromise or arrangement. The schemes fell within section 899 of the Companies Act 2006. They were part of a wider restructuring under which existing claims were substituted by new claims and assets were transferred. They were therefore not a total surrender. Re Greenhaven Motors Ltd [1999] BCC 463 and In re NFU Development Trust [1972] 1 WLR 1548 were distinguishable. The court’s task on a scheme was different from the liquidation compromise exercise described in Re Telewest Communications plc (No 2) [2005] 1 BCLC 772.
5. Disposition. The schemes did not unfairly affect the Mezzanine Lenders. Their legal rights remained unaffected, they had no relevant economic interest, and refusal of sanction merely to generate further negotiations would not be a legitimate use of the court’s power.