Re ColourOz Investment 2 LLC

The court considered applications under Part 26 of the Companies Act 2006 for orders convening meetings of creditors to consider proposed schemes of arrangement which would extend the maturity dates of material secured term loan facilities. Key legal principles considered were: (i) the court's role at the convening hearing is limited to questions going to jurisdiction (including class constitution) and other non-merits issues identified in the Practice Statement; (ii) Part 26 can authorise a scheme to vary or release creditors' rights against third-party guarantors where that is necessary to give effect to the proposed arrangement; (iii) the adequacy of notice under the Practice Statement is judged by reference to the circumstances, complexity of the scheme and any urgency; and (iv) the existence of lock-up agreements and consent fees does not automatically fracture a class but may be relevant to be addressed at sanction. The court concluded that the classes proposed were appropriate, that there were no obvious "roadblocks" to eventual sanction (including on jurisdictional grounds on the basis of the change to English governing law and jurisdiction), but that the short period of notice required remedial provision. It therefore granted the convening orders sought with a modification giving creditors a further period within which to apply to vary or discharge the order.

Background and parties

The applications were brought by seven companies in the Flint group (the "Companies") for orders convening one or more meetings of their lenders (the "Scheme Creditors") to consider seven separate schemes of arrangement under Part 26 CA 2006. The Schemes form part of a broader refinancing/restructuring negotiated with an ad hoc group of lenders and set out amendments to the First Lien and Second Lien credit agreements and to the intercreditor agreement (ICA), including extensions of maturity dates, changes to interest margins, introduction of PIK interest and other commercial amendments.

Nature of the application

• The Companies sought meetings under section 896(1) CA 2006 to summon scheme meetings so that the Scheme Creditors could consider and, if thought fit, approve the Schemes.

Issues framed by the court

• Whether the court had jurisdiction to convene meetings and whether there were any matters going to jurisdiction (including the relevance of the Recast Judgments Regulation and Article 25 and the recent change of governing law and jurisdiction clauses to English law);
• Whether the Schemes constituted a permissible "compromise or arrangement" under Part 26, including the power to vary guarantors' rights;
• Proper class composition for voting at scheme meetings;
• Adequacy of notice of the convening hearing under the Practice Statement and whether the short notice meant the hearing should be adjourned; and
• Whether features such as the Lock-Up Agreement, consent fees and payment of adviser fees fractured classes or otherwise raised jurisdictional or procedural problems.

Court's reasoning and disposition

The judge observed that at a convening hearing the court must address class questions and other matters affecting jurisdiction but must not adjudicate the merits or fairness of the scheme. He held that:

• The Companies were the type of entities to which Part 26 applies and the proposed arrangements involved the necessary element of "give and take" to qualify as a compromise or arrangement;
• Part 26 can lawfully vary creditors' rights against guarantors where necessary to give effect to the arrangement, and the mechanism of appointing a nominated attorney (Holdco) to execute amendment or release documents on behalf of Scheme Creditors fell within established authorities;
• On the assumed applicability of the Recast Judgments Regulation and on expert New York law evidence, the change of governing law and jurisdiction to English law satisfied Article 25 for present purposes, leaving questions of sufficient connection and international recognition to be considered at sanction;
• Proposed class composition (one class for each set of lenders under each Credit Agreement, and for Flint GmbH separate First Lien and Second Lien classes) was appropriate given the similarity of legal rights within each proposed class; and
• Although the convening hearing had been given only two working weeks' notice, the absence of urgency in the sense of imminent insolvency, together with the complexity of the Schemes, meant longer notice was preferable. However, having regard to the extent of prior engagement with lenders and the limited value of non-locked-up claims, the judge declined to adjourn. Instead he granted the convening orders with a modification: the meetings order allowed Scheme Creditors until 17 July 2020 to apply to vary or discharge the order (resulting in approximately four weeks from the Practice Statement letter), and the meetings were to be held virtually with due evidence at sanction about the conduct of those meetings.

The judge also noted that issues such as the impact of consent fees on voting intentions are matters for the sanction hearing and the court's exercise of discretion there.

The court made the orders convening the scheme meetings sought by the Companies, but with a modification. The judge concluded that the classes as proposed were properly constituted, that Part 26 could authorise the variation of guarantors' rights where necessary, and that (on the evidence and assumptions advanced) there was presently no obvious "roadblock" to eventual sanction including on jurisdictional grounds. Because the convening hearing had been given a short period of notice, the court permitted a further period until 17 July 2020 for creditors to apply to vary or discharge the meetings order before the meetings proceed; virtual meetings and a timetable to a sanction hearing were directed. The order was therefore made with that modification.