Madagascar Oil Limited, Re

The court granted an order under section 901C Companies Act 2006 convening two separate meetings of Plan creditors to consider a Part 26A restructuring plan proposed by Madagascar Oil Limited. The judge held that the jurisdictional threshold was met because the relevant debt documentation is governed by English law and the company was a "company" liable to be wound up under the Insolvency Act 1986. Condition A (serious financial difficulties affecting going concern) and Condition B (a compromise or arrangement with an objective to mitigate those difficulties) under section 901A were satisfied: there was a genuine element of give and take and BMK’s proposed new-money injections constituted commercial consideration. The court accepted that separate classes for BMK and Outrider were justified because their "rights out" under the plan are materially different such that joint consultation would be impossible. Matters of international effectiveness, merits and fairness were reserved for the sanction hearing.

This was a convening hearing under Part 26A Companies Act 2006 brought by Madagascar Oil Limited (the Plan Company) for an order under section 901C to convene creditor meetings to consider a restructuring plan. The Plan is intended to restructure indebtedness under a guarantee and intercompany loans affecting the Plan Company and its operating subsidiary, Madagascar Oil S.A. (MOSA), in order to enable MOSA to recommence production at the Tsimiroro oilfield and to attract necessary capital.

Background and parties:

• MOL is the Plan Company; BMK Resources Ltd (BMK) is its parent and principal investor; Outrider Master Fund LP (Outrider) is a creditor under a Guarantee. MOSA is the operating company holding the Production Sharing Agreement for the oilfield.
• The group has very limited cashflow, negligible current production, substantial intercompany indebtedness and guarantees. BMK has been the principal funder and is said to be the only realistic investor willing and able to provide further capital.
• Outrider holds Guarantee claims of about US$71.25m; BMK holds Guarantee and intercompany claims and is proposed to provide new-money facilities under the Plan.

Nature of the application: MOL applied for convening orders under section 901C CA 2006 so that two meetings could be held (one of BMK and one of Outrider) to consider and vote on the restructuring plan under Part 26A.

Issues framed by the court:

• Adequacy of notice and whether an adjournment was required;
• Jurisdictional requirements for the court to exercise Part 26A powers;
• Whether conditions A and B under section 901A were met;
• Class composition and whether separate meetings were required;
• Other procedural or jurisdictional "roadblocks" not going to merit or fairness, including adequacy of the explanatory statement and practical arrangements for the meetings; and international effectiveness to be addressed at sanction.

Court’s reasoning and disposition:

• The adjournment application by Outrider was refused: the court concluded Outrider had adequate opportunity to address convening issues and any additional time required was for the sanction stage. The court criticised MOL’s late provision of material but did not consider that it caused unfair prejudice at convening.
• Jurisdiction: the Plan Company is a "company" for IA 1986 purposes and English-law governed debt documentation provided a sufficient connection to England to exercise Part 26A jurisdiction at the convening stage.
• Condition A was satisfied because the company faced severe financial difficulty and insufficient cashflow; expert evidence supported that the company would run out of viable liquidity without restructuring.
• Condition B was satisfied because the proposed plan involved give and take: BMK would provide committed and uncommitted new loans and receive releases and limited consideration, while Outrider would receive an election between an upfront cash payment or a capped revenue share plus a restructuring surplus payment, in exchange for full releases of guarantee claims. The court rejected the argument that BMK’s treatment involved only 'give' without 'take'.
• Class composition: the court accepted that BMK and Outrider have sufficiently different "rights out" under the plan to justify separate classes and meetings; a single class would make consultation impracticable and likely doom the plan.
• Third-party releases (including MOSA releases and limited releases of directors/advisers) were not treated as insuperable at convening, given authorities permitting such releases where necessary; the international effectiveness and recognition issues were reserved for sanction and expert opinions in Mauritius and Madagascar were to be produced at sanction.
• Practical arrangements, explanatory statement and timetable for meeting and sanction were adequate for convening; the court made the convening order directing two meetings and set a sanction hearing date.

The court therefore ordered the convening of two meetings (BMK and Outrider) and directed the timetable towards a sanction hearing, leaving merits, fairness and international recognition issues for determination at sanction.

The application to convene meetings under section 901C was allowed: the judge made an order convening two separate meetings of the two creditor classes (BMK and Outrider). The court found that (i) there was a sufficient jurisdictional connection to England, (ii) Condition A and Condition B under section 901A were satisfied because the company faces serious financial difficulty and the proposed plan embodies sufficient give and take (including BMK’s committed new-money facilities), and (iii) class composition justified separate meetings since the creditors’ "rights out" under the plan are materially different. Issues of international effectiveness, detailed fairness and the merits of the plan were reserved for the sanction hearing.