Sunbird Business Services Ltd, Re

The court will not sanction a scheme under Part 26 of the Companies Act 2006 unless creditors have received sufficient, accurate and timely information to make an informed decision. The explanatory statement must explain the scheme’s commercial effect, including realistic alternatives, valuation assumptions, stakeholder treatment and any material interests of directors. A later addendum may supplement an explanatory statement, but a material omission should be corrected within the court-ordered notice period or by further court directions. Informal communications with selected creditors do not ordinarily cure defects in the formal scheme documents. The court must exercise an independent discretion and will not treat the majority vote as determinative where the consultation process was materially defective or misleading.

Sunbird Business Services Ltd applied for sanction of a scheme under Part 26 of the Companies Act 2006. The scheme proposed converting approximately US$18.78 million of unsecured debt into shares and was linked to a fully underwritten rights issue.

The scheme was approved by the requisite majority, but six opposing creditors challenged the adequacy and accuracy of the information supplied. They relied on omissions concerning directors’ interests, insolvency recoveries, valuation, the rights issue and dilution. The central issues were whether the statutory and procedural requirements had been met, whether the formal documents enabled an informed vote, and whether the court could safely rely on the majority decision.

1. Application dismissed. The court declined to sanction the scheme.
2. Sections 897(1) and 897(2) of the Companies Act 2006 should be read purposively. An explanatory statement may be supplemented by an addendum, particularly where circumstances change. However, where the addendum cures a material omission, it should normally be circulated within the notice period specified in the convening order, or further directions should be obtained from the court.
3. The statutory and Practice Statement requirements demanded sufficient information for a reasonable creditor to assess the scheme’s commercial consequences. In a scheme offered as an alternative to insolvency, that ordinarily includes a realistic comparison of likely recoveries and timing, an explanation of valuation methodology, the treatment of stakeholder groups, and information enabling creditors to assess whether value is fairly allocated.
4. The explanatory statement also had to disclose the material financial and commercial interests of directors. Where an apparently independent adviser or expert was relied upon, the identity, role, terms of engagement and responsibility owed to creditors should be explained.
5. The documents failed materially in these respects. They did not provide adequate company-by-company information supporting the asserted negligible insolvency recovery, sufficient detail supporting the debt-for-equity valuation or rights issue pricing, or a proper explanation of the rights issue’s dilutive effect. The stated 69 per cent recovery of issued share capital if creditors took no rights was materially misleading; the correct figure was materially lower.
6. Informal communications with selected creditors, particularly communications connected with lock-up agreements, could not cure the defects. Unequal access to information undermined the reliability of the majority vote and prevented the court from treating it as a dependable reflection of the class’s commercial judgment.
7. The scheme jurisdiction involves a formidable compulsion upon dissenting creditors. It cannot be used to impose a compromise unless the statutory and procedural safeguards have been scrupulously observed.