Re Lecta Paper (UK) Ltd

The court sanctioned a scheme of arrangement under Part 26 of the Companies Act 2006 to restructure senior secured note debt and implement a partial debt-for-equity swap because the statutory requirements for sanction were satisfied. The judge applied the established three-part test (statutory compliance; fair representation and bona fide decision-making by the majority; and whether an intelligent and honest member might reasonably approve) and found each limb met.

Key legal points: (i) the existing senior secured notes in global form meant beneficial owners were creditors for Part 26 purposes (section 895 and scheme jurisprudence); (ii) a scheme can release claims against third parties and co-obligors where necessary to give effect to the arrangement; (iii) the court accepted measures taken to secure a sufficient connection with England (co-issuance and change of governing law to English law) and treated those measures as permissible "good forum shopping" where effective under the relevant law; and (iv) evidence from foreign and New York law experts supported the conclusion that the scheme would be effective and likely to be recognised in key jurisdictions, including under the Recast Judgments Regulation and by a Chapter 15 application in the United States.

This was a first instance application by Lecta Paper UK Ltd for an order sanctioning a scheme of arrangement under Part 26 of the Companies Act 2006 to compromise two series of senior secured notes with an aggregate face value of UR 600 million (existing SSNs) and related restructuring steps, including conversion into new senior and junior notes and a partial debt-for-equity swap.

Background and parties: The company was an English subsidiary in a heavily indebted European group. The restructuring was negotiated by a coordinating committee of creditors, a lock-up agreement was entered into, and the convening judge ordered a single class meeting which subsequently approved the scheme overwhelmingly (96.79% by value voting; 100% of votes cast in favour at the meeting).

• Nature of the application: the company applied for an order sanctioning the scheme under Part 26 CA 2006 and for limited powers to approve minor modifications at the sanction hearing.
• Issues before the court: (i) whether the scheme complied with statutory requirements (including the identity of scheme creditors); (ii) whether the class was properly constituted and fairly represented; (iii) whether releases of claims against co-obligors and third parties were within the court's jurisdiction; (iv) international jurisdiction and recognition (including the relevance of the Recast Judgments Regulation, Articles 25 and 8, and the likely recognition in Luxembourg, Spain, Italy and France); (v) whether the steps changing governing law and adding an English co-issuer were permissible; and (vi) fairness matters including fees, retail holder treatment and proposed minor modifications under clause 8.13 of the scheme.
• Court's reasoning: The judge concluded that statutory notices and convening procedures were complied with, that beneficial owners of global notes were "creditors" within Part 26 (relying on scheme jurisprudence), and that releases of claims against co-obligors and third parties were permissible where necessary to implement the restructuring. The court accepted expert evidence that the indenture amendments (co-issuance, change of governing law and jurisdiction) were valid under New York law and that, overall, the scheme was likely to have substantial effect and to be recognised in the relevant foreign jurisdictions. The court also found that the majority voting behaved bona fide, that creditor consultation and disclosure were adequate, that fees and retail-holder arrangements were not inherently unfair, and that the proposed minor modifications could be approved without material adverse effect on scheme creditors.

The court therefore made an order sanctioning the scheme and approved specified minor modifications.

The court made an order sanctioning the scheme of arrangement under Part 26 CA 2006. The judge held that the statutory requirements were satisfied: the scheme creditors were properly identified (including beneficial owners of global notes), the class was properly constituted and fairly represented, the majority acted bona fide, and the scheme was one which an intelligent and honest member might reasonably approve. The court also held that releases of claims against co-obligors and third parties were within its jurisdiction; that the amendments to the indentures effecting an English co-issuer and English governing law were valid; and that expert evidence sufficiently established that the scheme was likely to be effective and recognised in the jurisdictions of relevance. Minor modifications under the scheme were also approved as not materially adverse to scheme creditors.