Obrascon Huarte Lain, SAV, Re

The court granted the Company's application to sanction a scheme of arrangement under Part 26 of the Companies Act 2006, relying on section 899. The judge applied the established checklist for sanction hearings (as summarised in Re KCA Deutag), and concluded that the statutory requirements had been complied with: the class was properly constituted, the requisite majorities in number and value had been obtained, the class was fairly represented and acted bona fide, and there was no "blot" or legal defect. The court found the Scheme to be commercially reasonable for creditors because implementation and the wider Restructuring offered a far better recovery (an expected full repayment of New Notes representing an 88 per cent recovery by reference to principal) than formal insolvency (estimated recoveries of about 8.8 to 12.4 per cent). The judge was also satisfied there was a sufficient English jurisdictional connection and a real prospect of international recognition (including Spain), and that limited administrative voting issues did not prevent sanction. Accordingly the Scheme was sanctioned.

Nature of the application: An application by Obrascón Huarte Laín (a Spanish incorporated holding company) for an order sanctioning a scheme of arrangement under Part 26 of the Companies Act 2006 (section 899) to compromise the rights of certain holders of two series of unsecured notes (the Existing Notes) as part of a wider Restructuring.

Background and parties: The Company is the issuer of two series of unsecured notes (2022 Notes and 2023 Notes) governed by English law, with an outstanding principal of approximately €592.9m. The Group faced severe liquidity problems and failed to make coupon payments due on 15 March 2021. The directors and lenders promoted a Restructuring in which the Existing Notes held by the Scheme Creditors would be cancelled and exchanged for New Notes issued by a new Spanish subsidiary at an exchange rate of €880 for every €1,000 (an 88 per cent exchange), with an enhanced security and guarantee package, extended maturities (50% due 31 March 2025; balance due 31 March 2026) and a different coupon/PIK structure.

Procedural posture: A convening hearing on 18 March 2021 resulted in a single class meeting order. The Scheme Meeting on 9 April 2021 was approved by 358 of 360 voting creditors (99.8% by value) with 90.7% turnout. The sanction hearing was before Mr Justice Miles on 15 April 2021.

Issues framed by the court: (i) whether statutory requirements under section 899 were met; (ii) whether the class was properly constituted and fairly represented; (iii) whether a reasonable creditor could approve the Scheme (commercial fairness); (iv) whether there was any "blot" or legal defect; and (v) whether there was a sufficient connection with England and a realistic prospect of the Scheme having international effect, including recognition in Spain.

Court's reasoning and findings: The court followed the four-step checklist drawn from Re KCA Deutag plus the international recognition enquiry. It found the statutory majorities and convening procedures complied with, and that the class had been properly constituted and represented. The overwhelming creditor approval, the commercial context (company close to insolvency), PwC evidence estimating poor insolvency recoveries (8.8–12.4%) versus the prospect of full repayment on the New Notes under the Restructuring, and the security/guarantee package supported a conclusion that a creditor could reasonably approve the Scheme. The judge accepted that payment of a disclosed lock-up fee and the existence of Backstop Providers (who will receive a conversion on different terms outside the Scheme) were commercially justified and not unfair. Minor administrative voting lapses affecting a small number of creditors, caused by account holders, were addressed by contractual and trust arrangements in the Restructuring Implementation Deed and did not prevent sanction. The court was satisfied there was a sufficient connection to England (English governing law and jurisdiction clauses) and that expert evidence indicated likely recognition in Spain, so the Scheme would have substantial international effect. The judge therefore sanctioned the Scheme.

Other notable points: The Restructuring Implementation Deed authorises agents/attorneys to implement the compromise and contains a standard release clause for advisers and directors. Once effective, steps in Spain (homologación judicial) are contemplated to guard against unwinding.

The court granted the Company's application and sanctioned the Scheme under section 899 of the Companies Act 2006. The judge concluded that the statutory requirements had been met, the class was properly constituted and fairly represented, the overwhelming creditor support and the commercial comparison with likely insolvency outcomes made the Scheme reasonable for creditors, there was no legal defect, and there was a sufficient connection to England with a realistic prospect of international recognition (including Spain).