Re House of Fraser (Funding) Plc

This was an application under Part 26 of the Companies Act 2006 for an order convening a single meeting of scheme creditors to consider a scheme of arrangement. The principal legal issues were (i) the correct class composition for voting on the proposed scheme, (ii) whether sufficient notice of the hearing had been given, and (iii) whether there were obvious jurisdictional or enforceability defects making the application futile.

The court applied the insolvency comparator: the relevant comparator for assessing whether creditors form a proper class was the position in insolvency. Because acceleration on existing cross-guarantees would make maturity dates effectively the same in insolvency, and because an intercreditor agreement provided for pari passu ranking and common security, the judge found no relevant difference between holders of the Notes and lenders under the senior facilities agreement that would require separate classes. The difference in contractual interest rates was considered but, on the evidence of likely low returns in insolvency, was not sufficient to fracture the class.

The court also considered the admissibility of expert insolvency-return evidence. A KPMG report was initially produced on a "non-reliance" basis and therefore could not be treated as evidence, but KPMG subsequently extended a duty of care for the limited purpose of the scheme application so the court accepted the report for the hearing. The judge found 12 days' notice adequate given urgency and the institutional nature of the creditors. The court therefore directed that there be a single class of scheme creditors and approved proceeding to an approval hearing.

This was a first instance application by House of Fraser (Funding) plc for an order convening a single meeting of scheme creditors under Part 26 of the Companies Act 2006 to consider a proposed scheme of arrangement forming part of a wider group restructuring. The restructuring package comprised two parallel schemes (one in England and one in Scotland), creditors' voluntary arrangements, a sale transaction and further operational restructuring. The scheme before the court did not write off any debt but sought to amend and extend key financial instruments, align security and change-control provisions, and facilitate new super-senior debt and investment.

The principal factual background was a liquidity crisis caused by a combination of competitive pressures, cost increases and imminent maturities: in particular a circa £26 million exposure to certain lenders referred to as "the Indian banks" was due within weeks. The Notes (circa £175 million) mature later and a senior facilities agreement (SFA) had staggered maturities; cross-guarantees and an intercreditor agreement linked the obligations across group companies. Most creditors consented to the proposed restructuring, but the Indian banks did not.

The court framed issues as:

• class composition for voting (whether the Noteholders and SFA lenders should vote in a single class);
• whether notice of the convening hearing was sufficient given urgency; and
• whether there were jurisdictional or New York enforceability problems making the application plainly futile.

On the class issue the court applied the insolvency comparator: in insolvency all maturities would accelerate and the intercreditor agreement provided for pari passu ranking and common security, so maturity differences were not a relevant distinguishing factor. The difference in contractual interest rates was a relevant right but, given the expert evidence (KPMG) that returns in insolvency were likely to be modest, that difference did not justify multiple classes. The court initially rejected the KPMG report because it had been provided on a "non-reliance" basis, but after KPMG extended a duty of care limited to advancing the scheme, the report could be relied on and the court accepted it for the purpose of assessing likely insolvency returns. On notice, the court held that although 14 days is a normal minimum, 12 days was adequate given urgency and the institutional nature of the creditors. The court assumed for present purposes that the relevant EU jurisdictional regulation applied (which would give jurisdiction) and noted that a favourable New York law opinion would be produced at the approval hearing; there were no apparent futility issues to bar the application. The judge ordered that a single class of scheme creditors be convened and approved proceeding to an approval hearing.

The court therefore allowed the company's application to convene a single class meeting, primarily on the grounds that the insolvency comparator, the intercreditor agreement's pari passu provisions, and the permitted reliance on the KPMG insolvency-return report showed no relevant difference between the creditors that would require separate classes.

The court granted the application to convene a single class meeting of scheme creditors and approved the process to proceed to an approval hearing. Rationale: applying the insolvency comparator, the likely acceleration of maturities in insolvency, the intercreditor agreement's pari passu and shared security provisions, and admissible expert evidence as to modest expected insolvency returns, the differences between Noteholders and SFA lenders did not justify separate classes. Notice was adequate given urgency; no clear futility on jurisdiction or New York enforceability was shown.