Re Petra Diamonds US$ Treasury plc

The court considered an application for an order convening a meeting of holders of US$650 million notes under a proposed scheme of arrangement pursuant to Part 26 of the Companies Act 2006. Key legal questions were whether the holders of the Existing Notes constituted a single class for voting purposes, whether there were any jurisdictional or other "roadblocks" to the scheme, and whether the arrangements for ascertaining and taking the will of scheme creditors were adequate.

The judge held that the holders were properly classed together because their present rights under a single indenture and the rights conferred by the scheme were identical. The court examined features said to risk fracturing the class (the new-money provisions, a lock-up agreement, backstop and restricted-period fees, adviser reimbursement, and limited nomination rights) and concluded none of them, on the evidence, obviously fractured the class although they could be reviewed at the sanction hearing in the light of the meeting outcome. The court accepted jurisdiction over the company and identified Article 8 of the Recast Jurisdiction and Judgments Regulation as the gateway for binding overseas creditors, subject to fuller evidence at sanction. Finally the court found no obvious roadblock in the scheme and that the proposed voting and electronic meeting arrangements were adequate for a convening order. Accordingly the court ordered that the meeting be convened.

The Petra group, ultimately held by Petra Diamonds Limited, operated diamond-mining businesses and had funded the group with a package of first-ranking ZAR facilities and US$650 million of notes (the Existing Notes) issued by Petra Diamonds US$ Treasury Limited (the Company). Following a substantial fall in rough-diamond prices and resulting liquidity pressure, the group proposed a restructuring comprising a scheme of arrangement under Part 26 CA 2006 in relation to the Existing Notes and a consensual restatement of the first-lien facilities outside the scheme.

Nature of the application: The Company applied for a convening order to call a meeting of Existing Noteholders to consider and, if thought fit, approve the proposed scheme. Relief sought was the court order to convene the meeting and to approve specified mechanics for notice, voting and the holding of an electronic meeting.

Issues framed by the court:

• Whether notice and dissemination of information to scheme creditors was sufficient for the convening hearing;
• Whether the holders of the Existing Notes were "creditors" and whether the proposal amounted to a compromise or arrangement within Part 26;
• Whether the Existing Noteholders should meet as a single class or be split because of differences in rights arising from scheme features (class composition);
• Whether the court had jurisdiction to make orders binding overseas scheme creditors (including consideration of the Recast Insolvency Regulation and the Recast Jurisdiction and Judgments Regulation and Article 8);
• Whether there were any legal or practical "roadblocks" apparent at the convening stage; and
• Whether the proposed voting timetable and electronic meeting arrangements were adequate.

Court's reasoning and findings: The court was satisfied that notice and the scheme website gave creditors an informed opportunity to attend. The Existing Noteholders were held to be contingent creditors for the purposes of Part 26 and the proposals involved the requisite "give and take". On class composition, the judge analysed five potentially divisive features: (i) new-money provisions (including assignability and low minimum denomination) were open to all and did not fracture the class; (ii) a lock-up agreement giving a modest additional allocation did not in itself fracture the class and was not obviously material; (iii) backstop and restricted-period fees payable to ad hoc committee members were either commercially justified and not dependent on the scheme taking effect (cash alternatives existed), and so did not materially fracture the class; (iv) reimbursement of advisers by the Company was reimbursement for benefit to all holders and not a disguised bonus; and (v) limited nomination rights for large holders were a function of size and did not confer control.

On jurisdiction, the Company was incorporated in England and had its centre of main interest in the United Kingdom. The court followed established practice in treating the Recast Jurisdiction and Judgments Regulation as applicable for present purposes and identified Article 8 as the jurisdictional gateway to bind overseas creditors, subject to fuller evidence at the sanction stage. No obvious roadblocks were found in the scheme text, including conventional release provisions. The proposed timetable and electronic meeting mechanics were tight given the holiday period but adequate, with provision for the chairman to accept late votes.

Conclusion: The convening order was made. The court emphasised that detailed issues including the fairness and representativeness of the vote would remain open to scrutiny at the sanction hearing.

This was a first instance application for a convening order under Part 26 Companies Act 2006. The court granted the order to convene a meeting of the holders of the Existing Notes. The judge concluded that the Existing Noteholders formed a single class for voting, that there was jurisdiction to exercise the court's powers (with Article 8 of the Recast Jurisdiction and Judgments Regulation providing the gateway), that no obvious legal or practical roadblock existed to prevent the scheme proceeding, and that the arrangements for notice, voting and an electronic meeting were adequate for a convening order. The court left detailed matters, including fairness and representativeness, to be examined at the sanction hearing.