Re KCA Deutag UK Finance PLC

The court sanctioned a scheme of arrangement under Part 26 of the Companies Act 2006 to implement a group restructuring. The judge found that the statutory requirements had been complied with, the single class of Scheme Creditors had been properly constituted (following the convening hearing), the meeting was representative and the statutory majorities were obtained (approximately 96.96% turnout by value; 99.47% in number and 98.97% by value voting in favour). The scheme would exchange around $2 billion of indebtedness for $500 million of new senior secured notes plus initial equity in a new Jersey holding company; ancillary matters (management incentives and warrants) were considered but did not alter the class question.

The court applied the established sanction principles (Re National Bank Ltd and Re Telewest Communications plc (No. 2)): compliance with the statute, fair representation of the class, that an intelligent and honest member might reasonably approve the scheme, and absence of any "blot". The judge accepted independent valuation evidence (Deloitte) showing the scheme produced materially better recoveries than liquidation or distressed sale and was likely to have international effect. On that basis the court concluded the scheme was appropriate to sanction.

Background and parties: The applicant, KCA Deutag UK Finance plc, an English incorporated finance company within an international drilling group, sought sanction of a scheme of arrangement under Part 26 of the Companies Act 2006 to effect a restructuring caused by COVID-19 and oil-price driven distress. The Scheme addressed approximately $2 billion of indebtedness and proposed exchange for $500 million of New Notes and initial share capital in a Jersey holding company.

Nature of the application: An application for court sanction of the scheme following a convening hearing and a single class creditor meeting.

Procedural posture: The convening hearing was held before Mr Justice Trower ([2020] EWHC 2779 (Ch)) who authorised a single class meeting. The sanction hearing considered whether the scheme should be approved.

Issues before the court:

• Compliance with statutory requirements and the convening order (including adequacy of the explanatory statement);
• Whether the class was properly constituted and fairly represented and whether the majority acted bona fide;
• Whether the scheme was one that an intelligent and honest member might reasonably approve (the "fairness" test);
• Whether there was any other "blot" or defect; and
• Whether sanctioning the scheme would be effective given its international elements (recognition in other jurisdictions).

Court's reasoning: The court applied the established authorities (notably Re National Bank Ltd and Re Telewest (No. 2)) and confirmed the convening judge's class determination. The explanatory statement and Deloitte valuation were held to provide sufficient and independent analysis of the alternatives (distressed sale or liquidation) and showed materially worse recoveries in those alternatives. The meeting was highly representative and supported by contractual lock-ups; payment of certain "work fees" did not materially affect the result. Potential dilution from post-scheme management equity or warrants was identified, but the explanatory statement disclosed the risk sufficiently and such dilution would occur only in favourable exit scenarios (above specified return thresholds), making it unlikely to have affected votes. Expert evidence supported likely recognition in key foreign jurisdictions. No fatal blot or defect was identified.

Relief granted: The court ordered sanction of the Scheme, concluding it was appropriate to sanction on the terms presented.

Application granted and the scheme sanctioned. The court concluded statutory requirements under Part 26 had been met, the single class was properly constituted and fairly represented, the scheme was one which an intelligent and honest creditor might reasonably approve (supported by independent Deloitte analysis and overwhelming creditor support), there was no material blot or defect, and there was a reasonable prospect of international recognition so the court would not be acting in vain.