Sunbird Business Services Ltd, Re

When sanctioning a scheme of arrangement, the court must ensure that creditors have been properly consulted on sufficient information and that the statutory requirements have been met. The explanatory statement must provide information reasonably necessary for creditors to make an informed decision about the scheme and how to vote. Accuracy and completeness are essential safeguards, but perfection, audited accounts and a full independent review are not invariably required. The court may adopt a practical approach suited to the circumstances, including the sophistication of the creditors and the limitations disclosed in the financial information. The decisive question is whether identified defects were likely to have affected the creditors’ decisions. The court should generally defer to creditors’ commercial judgment where the scheme is one that an intelligent and honest creditor might reasonably approve.

Sunbird Business Services Limited applied under Part 26 of the Companies Act 2006 for sanction of a scheme converting approximately US$15.9 million of creditor debt into shares, followed by a US$3 million rights issue. An earlier, substantially similar scheme had been refused sanction because the information supplied to creditors was inaccurate, incomplete and misleading. A second application resulted in an order convening the creditors’ meeting, where the revised scheme obtained the statutory majorities.

Opposing creditors argued that the revised Scheme Document still contained material inaccuracies, inadequate financial information and insufficient evidence that the company would remain viable after implementation. The central issue was whether the defects in the documentation prevented proper consultation and justified refusing sanction.

1. Sanction test. The court applied the established principles governing schemes of arrangement: statutory compliance; fair representation of the relevant class; good faith and absence of coercion; and whether the scheme was one that an intelligent and honest creditor, acting in his own interests, might reasonably approve. Creditors are ordinarily better placed than the court to assess commercial risk.
2. Information and consultation. Sections 896 and 897 of the Companies Act 2006, together with paragraph 14 of the Practice Statement, required the Scheme Document to explain the commercial impact of the scheme and provide information reasonably necessary for an informed decision. The statement should disclose directors’ material interests and explain the effect of the scheme on those interests. Where professional advice is relied upon, the document should identify the adviser, explain the basis and scope of the work, and state whether responsibility is accepted.
3. Defects in information. The financial information and insolvency analysis contained serious errors and anomalies. The accounting records were profoundly unsatisfactory, and the information fell below the standard normally expected. Nevertheless, the defects did not materially affect the decision of the sophisticated creditors. The court could take account of the repeated presentation of the scheme, the creditors’ knowledge of the earlier refusal, the disclosure of JCK’s limited role and disclaimer, and the absence of lock-up obligations.
4. Independent review and viability. Audited accounts or a full independent review were not absolute prerequisites for sanction. The court did not need certainty that the restructuring would succeed. It required credible evidence that sanction would not be entirely futile. Whether the rights issue provided sufficient working capital was principally a matter of commercial judgment and risk for creditors.
5. Conduct of opposing creditors. The court endorsed the criticism in Stronghold Insurance Company Limited and Re Ophir Energy plc of creditors who raise undeveloped objections in correspondence but do not attend or properly present them. The failure of the opposing creditors to raise their points with fellow creditors before the vote materially weakened their challenge.
6. Outcome. Despite the defects, the court was satisfied that the scheme was one which an intelligent and honest creditor might reasonably approve and sanctioned it under section 896.