KCA Deutag UK Finance PLC, Re (In the Matter of the Companies Act 2006)

On an application to sanction a scheme under Companies Act 2006 Part 26, the court must be satisfied that the statutory requirements have been met, the class was fairly represented, the voting majority acted bona fide and for proper purposes, and the scheme is one which an intelligent and honest creditor might reasonably approve.

That inquiry does not require the court to select the fairest or best available scheme. Where creditors have received adequate information, the meeting is representative, and there is no improper motive, the court will ordinarily give substantial weight to the commercial judgment of an approving majority. For an international scheme, the court must also be satisfied that sanction will have substantial practical effect and will not be futile.

KCA Deutag UK Finance plc, a finance company within an international drilling group, applied to sanction a creditors’ scheme of arrangement under Companies Act 2006 Part 26. The group’s liquidity pressures and reduced earnings required a substantial debt restructuring.

The scheme compromised about US$2 billion of financial debt. Scheme creditors would receive new secured notes and equity in a new Jersey holding company. The alternative outcomes were a distressed sale or liquidation, both predicted to yield materially lower recoveries.

Following the convening decision, [2020] EWHC 2779 (Ch), a single class meeting approved the scheme by 99.47% in number and 98.97% in value of those voting. The issue was whether the court should sanction the scheme.

1. The application was granted. The court sanctioned the scheme on the terms of an order to be settled with counsel.

2. The statutory and procedural requirements were met. The convening court had properly determined the single-class issue. There was no material reason to revisit that conclusion. The possible future dilution arising from a management incentive plan or warrants did not alter the class question because the warrants would be issued to participating shareholders, not scheme creditors.

3. The meeting was properly convened and representative. The explanatory statement gave creditors the information reasonably required to assess the scheme. Although the possible dilution was not prominent, it was disclosed and was unlikely to have affected voting, particularly because warrants could be exercised only after creditors had obtained a return of at least 115% of their scheme debt.

4. The statutory majorities were obtained. The approving majority acted in the interests of the class as a whole. The evidence concerning work fees did not suggest improper influence: many approving creditors received no fee, while the sole opposing creditor did receive one.

5. The scheme was one which an intelligent and honest creditor might reasonably approve. The court’s role was not to choose the fairest or best commercial outcome. In light of the explanatory material, independent valuation analysis and overwhelming support, the creditors were better judges of their commercial interests and there was no reason to depart from their decision.

6. There was no technical blot or other defect. Nor would sanction be futile internationally. The lock-up arrangements and overwhelming creditor support, together with expert evidence on recognition in relevant foreign jurisdictions, gave a reasonable assurance that the scheme would have substantial international effect.

High Court (Chancery Division): This was the sanction hearing. At the earlier convening hearing, the High Court ordered a single class meeting: [2020] EWHC 2779 (Ch).