Kington SARL v Thames Water Utilities Holdings Limited (convening/order background)

The court granted the Plan Company permission to convene seven class meetings of its finance creditors under Part 26A of the Companies Act 2006 to consider an interim restructuring plan providing bridge financing. The judge confined the hearing to procedural matters for convening and the preparation for a later sanction hearing and expressly did not decide the merits of the Plan or whether it should be sanctioned.

The court held that jurisdiction under Part 26A exists and that conditions A and B (s.901A CA 2006) are satisfied: the Plan Company has encountered financial difficulties and the proposed bridge finance is a compromise or arrangement whose purpose is to mitigate those difficulties. The convening notice was sufficient for sophisticated creditors.

On class composition the court approved seven classes (liquidity lenders, interest-rate/index hedging providers, Class A make-whole, Class A non-make-whole, Class B lenders/bondholders, currency hedge providers, and the subordinated creditor). The judge concluded that differences such as make-whole rights, backstop fees and voting mechanics did not make it impossible for members of each proposed class to consult together with a view to their common interest and therefore did not require further fragmentation of classes.

The application was by Thames Water Utilities Holdings Limited (the Plan Company) for directions to convene seven meetings of its finance creditors to consider a restructuring plan under Part 26A CA 2006 intended to provide interim "super senior" bridge funding and an extension of maturities as a platform for a later holistic recapitalisation. The Plan Company, various creditor ad hoc groups, hedging counterparties and related Group entities appeared.

Background and parties:

• The Group is the principal provider of water and sewerage services in the Thames area and includes licensed operating companies (TWUL, TWUF) and a debtor/guarantor structure sitting within a whole-business securitisation governed by a security trust and intercreditor deed (STID).
• Debt relevant to the Plan was categorised into liquidity facilities, Class A debt, Class B debt, interest-rate/index hedges, currency hedges and subordinated loans; total non-hedging debt was circa £19 billion per the Plan Company.
• Negotiations had produced an interim platform transaction supported by a Transaction Support Agreement (TSA) with a proposed £1.5 billion super senior initial funding (and potential further accordion funding), consent fees, backstop arrangements and amendments to covenant and priority provisions. An alternative proposal was advanced by a Class B ad hoc group (the Class B proposal), which the Plan Company says is not viable and which gave rise to contested issues between creditor groups.

Nature of the application and issues:

• The application sought directions for convening creditor meetings and related procedural matters in advance of a future sanction hearing; the court was not to decide fairness or sanction at this stage.
• The principal legal issues were: (i) whether the court had jurisdiction under Part 26A (including whether conditions A and B are met); (ii) sufficiency of notice to creditors; (iii) proper composition and number of creditor classes for convening (applying the test that a class must be confined to creditors whose rights are not so dissimilar as to make consultation impossible); and (iv) whether any "road blocks" or lack of jurisdiction required refusal to convene meetings.

Court’s reasoning and findings:

• Jurisdiction: the Plan Company falls within Part 26A and there were no international jurisdiction issues. The court accepted that Part 26A may operate in an insolvency-like context and therefore convening could have consequences under finance documents, but such consequences did not preclude the convening application.
• Conditions A and B: condition A (financial difficulties affecting ability to continue as going concern) was met on the evidence. Condition B was satisfied because the proposed bridge financing constitutes an arrangement intended to mitigate the Plan Company’s financial difficulties; the court accepted the broad drafting of condition B and that an amend-and-extend structure can amount to an arrangement.
• Notice: the Practice Statement Letter, circulated 25 days before the convening hearing and with earlier publication of the term sheet, provided sufficient notice for sophisticated creditors to take advice and attend.
• Class composition: applying established authorities, the court concluded seven classes were appropriate. The main determinant of class distinction was priority in the payment waterfall (including make-whole versus non-make-whole Class A rights). Other differences (varying maturities and interest rates, accession to the TSA, differing consent/backstop fees, and voting mechanics for public bondholders) were treated as matters going to interest rather than rights and did not make consultation within the proposed classes impossible. The court warned that the class constitution at this hearing is an aid to practical consultation and does not finally determine what the relevant alternative will be for cross-class cram-down at sanction.
• Comparator and relevant alternative: the Plan Company treated administration (special administration for TWUL plus ordinary administrations for others) as the comparator for class purposes; the Class B AHG argued its proposal might be the relevant alternative at sanction. The court held that even if the Class B proposal became the likely alternative at sanction, that would not necessarily invalidate the class constitution assessed here, because the convening exercise has a different analytical purpose from the binary "relevant alternative" assessment at sanction.

Conclusion: Directions to convene the seven class meetings were granted. The court made procedural rulings for the forthcoming sanction hearing but made no decision on sanction, fairness or whether the Plan would satisfy the cross-class cram-down test under s.901G.

The court granted the Plan Company permission to convene the seven class meetings sought. The judge held that jurisdiction under Part 26A CA 2006 existed, that conditions A and B were satisfied, that the convening notice was adequate, and that the proposed seven classes were properly constituted because differences between members of each class did not make it impossible for them to consult together with a view to their common interest. The court declined to consider or determine the merits of the Plan or the sanction at this stage.