Codere Finance 2 (UK) Ltd, Re Companies Act 2006

For scheme class composition, the court must focus on creditors’ legal rights, rather than commercial interests. The relevant comparison is between rights released or varied under the scheme and rights conferred in their place. Rights arising from a wider restructuring may nevertheless be relevant where they are, in commercial reality, disguised consideration for the compromise.

The court must assess the cumulative effect of benefits and what creditors provide in exchange for them. The existence of materially different benefits does not automatically create separate classes. The question remains whether the differences make it impossible for creditors to consult together with a view to their common interest. On the facts, a single class was appropriate.

Codere Finance 2 (UK) Ltd applied for an order convening a single meeting of creditors to consider a scheme under Part 26 of the Companies Act 2006. The scheme restructured existing notes and formed part of a wider transaction involving interim and new super senior notes, lock-up arrangements, fees and other benefits for an ad hoc creditor group.

Kyma Capital Ltd argued that the ad hoc group’s additional benefits created separate classes. The central issues were whether interim notes, backstop fees, work fees, advisers’ fees and consent fees were relevant to class composition, and whether the resulting differences made consultation in a single class impossible.

1. Single meeting ordered. Mrs Justice Falk concluded that the scheme creditors should vote as one class and made the requested convening order.
2. The governing test was whether creditors’ rights were so dissimilar as to make it impossible for them to consult together with a view to their common interest. The court had to focus on legal rights, not separate commercial interests. It had to compare the rights released or varied under the scheme with the new rights conferred in their place, using the likely liquidation as the comparator where appropriate.
3. Rights under lock-up or restructuring arrangements could not automatically be excluded merely because they were technically independent of the scheme. If they were in commercial reality disguised consideration for the compromise, they could be relevant to class composition. The work fee was relevant because it was calculated by reference to existing noteholdings, paid to the ad hoc group, and linked to the lock-up.
4. The interim notes and their associated discount and backstop were not treated as disguised consideration. They were issued in exchange for genuinely advanced funds, on commercial terms, and were not obtained in the creditors’ capacity as existing noteholders. Advisers’ fees had been agreed independently of the scheme and were excluded.
5. The court nevertheless considered the cumulative position. The services supplied, the benefits received, the participation of a non-investing ad hoc group member, the likely liquidation outcome and the substantial difference between liquidation and scheme returns were all relevant. Even assuming that some excluded benefits were relevant, the differences did not make consultation impossible.
6. The court also held that the Practice Statement letter gave sufficient notice and information, that it had jurisdiction because the company was incorporated in England, and that the scheme could compromise claims against co-obligors. Other issues, including virtual meetings and Chapter 15 recognition, were left for the sanction stage or addressed in the convening order.