Re Nostrum Oil & Gas PLC

This is an application under Part 26 of the Companies Act 2006 for the court to sanction a scheme of arrangement to implement a group-wide restructuring of Nostrum Oil & Gas Plc and related obligors. The court applied the established Part 26 principles (compliance with statutory requirements, fair representation of the class, and whether the scheme is one which an intelligent and honest man might reasonably approve) and concluded that the statutory formalities had been observed, the single class meeting was representative and the requisite majorities were obtained.

The judge addressed risks arising from sanctions affecting certain noteholders (the 'Sanctions Disqualified Persons') and accepted the proposed holding-period trust mechanism to retain the scheme consideration for such persons until they can lawfully receive it. The court accepted that an OFAC licence had permitted the meeting materials to be circulated and noted applications for further licences in other jurisdictions. The judge was satisfied that the scheme provided materially better recoveries than likely insolvency alternatives, that the lock-up fee was modest and disclosed, and that the co-issuer steps and change of governing law did not taint the scheme. Expert evidence and the overwhelming creditor support meant the court was not acting in vain in sanctioning a scheme with international aspects.

Background and relief sought:

• The Company applied for an order sanctioning a scheme of arrangement under Part 26 of the Companies Act 2006 to restructure two series of unsecured notes (aggregate principal about US$1.125 billion) and implement a broader group restructuring.

Parties, facts and procedural posture:

• The Company is the listed English parent of a group operating in Kazakhstan. Production and reserves had fallen, the group was over-leveraged, and the group had been in default on interest under the notes since July 2020. A lock-up agreement had been entered into with an ad hoc group of noteholders and the scheme had been approved by shareholders.
• A single class court meeting was convened; turnout was high and the vote in favour was overwhelming (over 99% by value of votes cast). Certain noteholders (estimated ~7.1% by value) are subject to sanctions and could not validly deal with the existing notes ('Sanctions Disqualified Persons').

Issues framed by the court:

• Whether statutory requirements and convening orders had been complied with;
• whether the class was fairly represented and the majority acted bona fide;
• whether the scheme was one an intelligent and honest member might reasonably approve (the fairness inquiry);
• whether there was any blot or defect (including the manner in which the Company became a co-issuer and the co-issuer structure);
• whether sanctioning the scheme would be effective given international aspects and sanctions-related restraints; and
• how Scheme Creditors who were Sanctions Disqualified Persons should be treated.

Court’s reasoning and conclusions:

• The court applied the standard tests from authorities such as Re National Bank Ltd and Re Telewest. It found that notice and convening directions had been followed, the explanatory statement was adequate, and the statutory majorities were achieved.
• The meeting was representative; there was no reason to think the majority had acted other than in the class interest. The likely recoveries under the scheme (29.4%–40%) compared favourably with expert-estimated recoveries in planned or unplanned insolvency (about 16% and 10.6% respectively), supporting the scheme’s reasonableness.
• The court accepted the use of a modest, disclosed lock-up fee and recent authorities permitting such fees. It endorsed the proposed holding-period trust to preserve scheme consideration for Sanctions Disqualified Persons until they could lawfully receive it, concluding that the structure did not disadvantage those persons beyond existing sanctions constraints.
• The court rejected arguments that the addition of an English co-issuer and change of governing law (to enable a Part 26 scheme) were a blot; it treated those steps as legitimate means to achieve an effective restructuring and 'good forum shopping'.
• The court was satisfied, in light of overwhelming creditor support, lock-up agreements and expert evidence on foreign recognition (Netherlands, Kazakhstan, United States), that the sanction would not be in vain and that the scheme was likely to be effective internationally.
• Accordingly, the court concluded it was appropriate to sanction the Scheme and made the order to that effect.

The court sanctioned the scheme of arrangement. The judge concluded that statutory requirements had been complied with, the class was properly represented and acted bona fide, the scheme was one which an intelligent and honest member might reasonably approve given superior expected recoveries compared with insolvency, the treatment of sanctioned noteholders by means of a holding-period trust was fair, and there was a reasonable prospect of international effectiveness. On that basis the sanction order was made.