Re Codere Finance 2 (UK) Ltd

The company sought an order convening a single meeting of holders of beneficial interests in two series of notes to consider a scheme of arrangement under Part 26 of the Companies Act 2006. The central legal issue was class composition: whether ad hoc committee members (AHC) who had negotiated and received particular commercial benefits (notably interim notes, backstop arrangements and a work fee) should be placed in a separate class from other scheme creditors. The court applied the established test that classes must be confined to creditors whose legal rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest, focusing on rights rather than commercial interests.

The judge concluded that the Interim Notes (and associated discount and backstop in respect of those Interim Notes) and the reimbursement of advisers’ fees were not rights to be taken into account for class composition because they were commercial transactions or genuinely independent commitments, whereas the work fee (1% of existing note principal pro rata to AHC members) was sufficiently linked to creditor holdings to be relevant. Having assessed the cumulative effect of the various benefits against what AHC members provided in exchange and against the realistic liquidation comparator, the court held that differences in rights were not so material as to make consultation impossible. Accordingly a single meeting of scheme creditors was to be convened.

Background and parties: The Company (a recently incorporated English co-issuer) is part of the Codere group which faced an acute Covid-19 induced liquidity crisis. The Company proposed a Part 26 scheme to extend and amend two series of Existing Notes and to raise new money (Interim Notes already issued and proposed New Notes) to avoid probable insolvency. The AHC (holding about 55% of Existing Notes) supported the transaction and had entered a Lock-up Agreement and term sheets providing a package of commercial benefits to AHC members. Kyma (holding c.0.74%) objected that AHC members should be separate class(es) because of preferential benefits.

Nature of the application: An application to convene a single meeting of scheme creditors for the purpose of considering and, if thought fit, approving the proposed scheme; urgent timetable required resolution of class issues at the convening hearing.

Issues framed: (i) Does the class of scheme creditors fracture into separate classes because certain AHC benefits are rights to be taken into account for class composition? (ii) If relevant, are the rights so dissimilar that it is impossible for creditors to consult together? (iii) Were practice statement/notice requirements satisfied? (iv) Other matters including jurisdiction and recognition issues.

Evidence and comparative valuation: The Company relied on director and CFO witness evidence and a Deloitte report projecting that the scheme would place the Group on a sustainable footing and likely result in holders of Existing Notes being repaid in full over a refinancing in 2023. Kyma’s expert evidence contended AHC members received materially superior treatment and that liquidation or more extensive restructuring were likely alternatives. The Lock-up Agreement and term sheets set out Interim Notes, New Notes, backstop and various fees (work fee, adviser reimbursement, consent fees).

Court’s legal analysis and reasoning: The court applied established authorities (Sovereign Life Assurance v Dodd; Re Hawk; Re UDL; Re Primacom) emphasising that class composition depends on legal rights (not commercial interests) and whether rights are so dissimilar as to make consultation impossible. The judge analysed individual elements:

• Interim Notes and associated discount/backstop: treated as commercial cross-holdings and as issued in exchange for funds advanced rather than as disguised consideration for the scheme; not treated as conferring scheme-dependent rights for class composition purposes.
• Work fee: calculated as 1% of Existing Notes payable pro rata to AHC and linked to the lock-up; this was sufficiently connected to holdings to be relevant to class composition.
• Advisers’ fees: evidence showed the Group had already agreed to meet these costs before the lock-up, so they were independent and not relevant to class composition.
• Backstop fee for the New Notes: an underwriting fee conditional on issuance of New Notes and paid for a commercial service; relevant but not, on the evidence, of a magnitude to fracture the single class.

The judge required further quantified evidence of cumulative effects and, after assessing revised figures submitted by the Company (which compared expected returns to maturity and included principal of new instruments), concluded the overall enhancement available to participating AHC members was not so great as to make it impossible for Existing Noteholders to consult together, particularly given the stark liquidation comparator. The fact that one AHC member did not participate in Interim Notes/backstop strengthened the conclusion that the class need not be fractured. The Practice Statement letter and notice were held adequate in the circumstances. Jurisdictional and recognition issues were addressed and did not prevent granting the convening order.

Remedy/outcome: the court made a convening order to summon a single meeting of scheme creditors. The judge indicated the sanction hearing would address merits and fairness, and preserved the parties’ rights to renew class arguments at sanction if appropriate.

Application to convene a single meeting was allowed. The court held that class composition should be determined by reference to legal rights, not commercial interests; Interim Notes (and their associated discount/backstop) and advisers’ fee commitments were not treated as rights for class composition purposes, the work fee was relevant but, after assessing cumulative effects against consideration provided by AHC members and the liquidation comparator, the differences were not so dissimilar as to make consultation impossible. A single creditors' meeting was ordered to be convened.