SWS Holdings & Anor, Re

At a convening hearing for a scheme under Companies Act 2006 Part 26, the court considers jurisdiction, notice, class composition and explanatory material, rather than scheme fairness. Class composition depends on whether creditors’ rights are sufficiently similar to permit consultation in a common interest. The analysis compares rights before and after the scheme by reference to the likely comparator if the scheme fails. Differences in interest rates, maturities, consent arrangements and additional third-party rights do not necessarily require separate classes. Courts should avoid unnecessary proliferation of classes where creditors face the same essential choice and there is more to unite than divide them.

SWS Holdings Limited sought a convening order for a scheme affecting debt in the Southern Water group. Greensands Financing plc sought a related scheme to amend and extend MidCo debt. The schemes were inter-conditional and were intended to facilitate new equity funding.

The court was asked to determine jurisdictional issues, adequacy of notice, the constitution of creditor classes, meeting arrangements and the sufficiency of explanatory statements. No party opposed convening the meetings or challenged the proposed classes. The central issues were whether the schemes constituted compromises or arrangements within Part 26 and whether the affected creditors could properly consult together in the proposed classes.

1. The court found no jurisdictional roadblock to either scheme. Each scheme company was an English company within s 895(2)(b) of Companies Act 2006. The contingent guarantee claims involved sufficient give and take to constitute a compromise or arrangement. The deeds of contribution did not prevent the court from having jurisdiction, although the treatment of underlying debt might require fuller consideration at sanction.

2. Notice of both proposed meetings was adequate, having regard to the information provided, prior creditor discussions and the urgency of the proposed funding.

3. The governing class test was whether creditors’ rights were not so dissimilar as to make consultation in a common interest impossible. The relevant rights included existing rights and rights conferred by the scheme. They had to be assessed against the likely comparator if the scheme did not proceed. Differences could be tolerated where creditors could still sensibly consult together.

4. For the SWS Scheme, separating creditors by seniority was appropriate because the comparator could affect senior and junior creditors differently. Different interest rates, maturities and the lock-up consent payment did not fracture the classes. Additional guarantee rights did not fracture the relevant class because they did not create a sufficiently different economic position. Class A4 was properly placed separately from Class A3 because of its make-whole rights, although combining them might also have been defensible.

5. For the MidCo Scheme, all creditors could vote in one class. They ranked pari passu, had similar security and faced the same essential choice: accept the amendment and extension or claim in an insolvency process. The different interest rates, maturities, subordinated make-whole rights and reimbursement of advisers’ fees did not create sufficiently meaningful differences in rights.

6. The draft explanatory statements were suitable for purpose. The court therefore convened meetings of creditors for both schemes and made associated case-management and procedural directions.