Re Bluebrook Limited

This was an application for the court's sanction of three schemes of arrangement under the Companies Act 2006, relating to a restructuring which would primarily affect the Senior Lenders and exclude subordinated (Mezzanine) lenders. The court applied established principles governing schemes of arrangement and the court's discretion to refuse sanction where there is de facto unfairness. Key factual and legal findings were (i) the intercreditor arrangements firmly subordinated the Mezzanine debt to the Senior debt, (ii) the valuation evidence relied on by the companies and the Senior Lenders (notably PwC, Rothschild and King Sturge material) demonstrated that the going-concern value of the group was significantly less than the Senior Debt, (iii) the Mezzanine Lenders’ LEK report, based on a Monte Carlo simulation, did not displace the companies’ valuation evidence or establish a real economic interest for the Mezzanine Lenders, (iv) there was no convincing evidence that the directors had breached duties or should have extracted a bargain for the Mezzanine Lenders, and (v) on the facts the Mezzanine Lenders lacked a relevant economic interest such as to require their inclusion. The court therefore concluded that the Mezzanine Lenders had not shown de facto unfairness and proceeded to sanction the schemes.

The application sought court sanction of three schemes of arrangement proposed by Bluebrook Ltd, IMO (UK) Ltd and Spirecove Ltd as part of a wider restructuring that would convert a large part of Senior Debt into equity in a new group and transfer the group's assets to that new structure (with a pre-pack administration and asset transfers to effect the move).

Parties and posture

• The scheme companies (Bluebrook, IMO and Spirecove) and a Senior Steering Committee representing Senior Lenders sought sanction.
• A Mezzanine Co-ordinating Committee represented subordinated Mezzanine Lenders who opposed sanction on grounds of unfair prejudice, asserting that the schemes would deprive them of any realistic economic return.

Relief sought

• Sanction of three schemes of arrangement under the Companies Act 2006 and approval of the mechanism by which Senior Lenders would be released and the group’s assets transferred into a new HoldCo/MidCo/NewCo structure.

Issues framed by the court

• Whether the Mezzanine Lenders had a real economic interest in the scheme companies such that their exclusion would be unfair.
• Whether the valuation evidence supported the Mezzanine Lenders’ contention that the group’s value exceeded the Senior Debt.
• Whether the scheme companies’ directors had failed in duties to the companies or creditors by not extracting a benefit for subordinated creditors.
• Whether the proposed arrangements fell within section 899 of the Companies Act 2006 as a "compromise or arrangement" that the court could sanction.

Reasoning and conclusions

• The court accepted established authorities that a company need not include creditors whose rights are untouched or who have no economic interest, and that the court may investigate whether a purported class has a real economic interest.
• The court reviewed valuation evidence: PwC, Rothschild and King Sturge produced going-concern valuations indicating business realisation proceeds materially below the Senior Debt (PwC top estimates c.£265m v Senior Debt c.£313m). The Mezzanine Lenders’ LEK report used Monte Carlo simulation and produced a distributional claim of likely higher valuation, but the court found the LEK methodology and disclosure unsatisfactory and gave it less weight.
• The court found that the Mezzanine Lenders had not shown a realistic prospect of value in excess of the Senior Debt and therefore did not establish a relevant economic interest requiring their inclusion in the schemes.
• Allegations that the directors breached duties or should have negotiated for the Mezzanine Lenders were late and insufficiently particularised; the evidence showed negotiations occurred and the Mezzanine lenders themselves led those negotiations, so the directors were not shown to have been under a duty to extract the outcome sought by the Mezzanine Lenders.
• The court concluded the proposals were within the scope of "compromise or arrangement" under section 899 and, exercising its discretion, found no de facto unfairness that would prevent sanction; accordingly the schemes could be sanctioned.

At first instance the court sanctioned the three schemes of arrangement. Rationale: the subordinated Mezzanine Lenders did not demonstrate a real economic interest in the scheme companies since credible going-concern valuations showed the business value to be below the Senior Debt; the Mezzanine valuation evidence was not sufficiently persuasive; there was no proved breach by directors of duties to secure a different outcome for subordinated creditors; and the schemes constituted arrangements which the court, in its discretion, could sanction.