Port Finance Investment Ltd, Re

At a convening hearing under Companies Act 2006, the court determines class composition, jurisdictional issues and whether the explanatory statement contains the essential information required for creditors to participate effectively. The merits and fairness of the scheme are generally reserved for sanction, subject to identifying any obvious roadblock.

Creditors form a single class where their rights are not so dissimilar that they cannot consult together in their common interest. A consent fee does not fracture the class where it is available to all creditors and is unlikely materially to induce support. The same approach may apply to a cash option, particularly where class subdivision would be practically unworkable. Adviser fees and unequal access to information require transparency and careful scrutiny, but do not necessarily fracture a class.

Port Finance Investment Ltd, a newly incorporated English subsidiary, applied for an order convening a meeting of holders of unsecured notes issued by a Turkish group company. The proposed scheme would exchange existing notes for new notes with an extended maturity, include a cash option and consent fee, and release creditors’ rights against other group companies.

The company had been created and had assumed liabilities principally to establish an English jurisdictional link. Issues arose concerning notice, jurisdiction, the use of a single creditor class, adviser fees paid for an ad hoc creditor group, access to information, the adequacy of the explanatory statement and a virtual meeting. The central questions were whether the meeting should be convened and whether any issue presented an obvious roadblock to sanction.

1. Outcome. A convening order was made for a single class of Scheme Creditors, with modifications and directions concerning notice, disclosure, voting and a virtual meeting.
2. Scope of the hearing. The court’s central task was to determine meeting composition and give directions. It could consider jurisdictional matters, but would not decide the scheme’s merits or fairness, except to identify an obvious roadblock to sanction. The question whether the Scheme Company was indebted to the Noteholders under the New York-law instruments was deferred until sanction because expert evidence was required.
3. Notice. Adequacy of notice was intensely fact-sensitive. The notice was insufficient because of the limited engagement with creditors, intermediary delays, the international and legally unfamiliar context, the complexity of the proposals and the omission of issues concerning adviser fees and information access. The court nevertheless allowed the matter to proceed and directed that creditors would not be subject to the Practice Statement restriction on raising issues at sanction.
4. Third-party releases and artificial structures. Part 26 schemes may include releases of rights against guarantors where ancillary and necessary to give effect to the compromise. The court did not decide whether the newly created co-obligor and contribution structure established jurisdiction. In light of recent first-instance authorities, it presented no obvious roadblock, but the issue was left for sanction with evidence of New York law and any contrary creditor argument.
5. Class composition. The governing test was whether creditors’ rights were so dissimilar that they could not consult together in their common interest. The comparison concerned rights released or varied and rights granted under the scheme, with practical considerations and the relevant counterfactual also material. The consent fee, cash option and adviser-fee arrangements did not require subdivision of the single class on the evidence.
6. Consent fee and cash option. A fee available to all creditors will not ordinarily fracture a class unless it is sufficiently large to influence a reasonable creditor materially. The 1% consent fee was not likely to induce a creditor who otherwise favoured rejection to vote for the Scheme. Although the cash option could create different practical outcomes, all creditors had the opportunity to elect for it and the identity of successful participants would not be known until after the auction. Concerns could therefore be raised at sanction.
7. Adviser fees and information. Reimbursement of reasonable fees independently payable and not conditional on sanction did not fracture the class. The proposed success fee for the financial adviser was unusual and required disclosure, but did not create a class issue because the ad hoc group knew of it, other creditors would be informed, other creditors could join the group, and any improvements or relevant information were to be made available equally.
8. Explanatory statement and meeting. The explanatory statement was adequate after amendment because it explained the Scheme, its background, the alternative outcome, its effect and directors’ interests. The court followed the approach permitting a virtual meeting and directed that evidence at sanction address the conduct of that meeting. A director was declared validly appointed as foreign representative for Chapter 15 recognition purposes.