Cortefiel, SA v Mep 11.S.A.R.L.

For a scheme of arrangement, creditor classes must be constituted by reference to the similarity or dissimilarity of their legal rights, rather than their commercial interests alone. The comparison concerns the bundle of rights held by each creditor, considered in the context of the company’s financial position and the realistic alternative to the scheme. Technical differences do not require separate classes where they have no material effect on creditors’ effective rights. Lock-up arrangements reflect creditors’ interests and do not alter their rights, so they do not affect class composition at the convening stage.

Cortefiel, a Spanish company, and MEP, a Luxembourg company, formed part of a group funded under a single senior facilities agreement. The companies sought orders convening creditor meetings to consider a restructuring scheme. Separate classes were proposed for facility A, facilities B1 and the revolving credit facility, and facilities B2 and B3.

The court had to determine whether it had jurisdiction and whether the proposed classes comprised creditors with sufficiently similar rights to consult together in their common interest. It was also necessary to consider the significance of lock-up arrangements and differences in repayment dates.

1. Jurisdiction. The court held that the Spanish and Luxembourg companies were companies liable to be wound up within the meaning of the Insolvency Act 1986. The companies had a sufficient connection with England and Wales because the senior facilities agreement was governed by English law and contained an English jurisdiction clause. The court was also satisfied that any resulting scheme would be recognised in Spain and Luxembourg.
2. Class constitution. At the convening stage, the court was concerned with whether creditors could sensibly consult together about their common interest, not with the overall fairness of the scheme. The relevant comparison is between legal rights, including the rights released, varied or conferred by the scheme. In assessing similarity, the court must consider the bundle of rights in context, including the company’s financial condition and the realistic alternative if the scheme is not implemented.
3. The proposed treatment of facility A differed materially from that of the other facilities because a substantial payment would be made in partial satisfaction of facility A, while repayment dates for the other facilities would be extended. Facility A therefore formed a separate class.
4. The resetting of financial covenants and the debt buy-back provision created common adjustments across the relevant facilities. Although margin increases differed numerically, they had the same economic effect because of the different operation of the facilities. Those differences did not require separate classes.
5. Lock-up arrangements did not affect class composition. They reflected creditors’ perception of their interests and did not change their existing or scheme rights. Their relevance arose, if at all, at the later fairness hearing.
6. The earlier repayment date of the revolving credit facility was a technical difference. In context, that facility was essential to the group’s operations and could not realistically be dissociated from the B facilities. The effective rights therefore did not materially differ.

The proposed classes were properly constituted, and the orders convening the meetings were granted.