Preserving the Golden Goose…
Richard Fisher identifies further guidance of the scheme practice arising from Mr Justice Snowden’s decision Indah Kiat International Finance Company B.V.  EWHC 246 (Ch)
In last summer’s 2015 Digest, I described Mr Justice Snowden’s decision on the VGG case  EWHC 2151 (Ch) as a “timely reminder of the degree of scrutiny that schemes may be subjected to at what are frequently unopposed or ex parte hearings, and the obligations of those who present the scheme to the Court”. Indah Kiat is an illustration of that relatively rare phenomenon: an opposed convening hearing. Whilst the outcome of the decision was simply that the convening hearing was adjourned, the comments made by Mr Justice Snowden provide further guidance (and pause for thought) regarding scheme procedure, and the materials that should be prepared in support of any scheme of arrangement.
How much notice do I have to give?
A frequent question posed to counsel is “What is the minimum amount of time that can be given to creditors between the circulation of the Practice Statement letter and the convening hearing?” The only correct answer is that it depends on the facts, although most of us have been uncomfortable with a period of less than 14 days, and would prefer more. In Indah Kiat, 14 days was the period between the Practice Statement letter being sent via an information agent to DTC, Euroclear and Clearstream for dissemination to creditors in the normal way (i.e. to account holders holding the relevant notes through their systems, and then on to underlying beneficial owners) and the convening hearing. Having confirmed that what is adequate notice will depend on all the circumstances (Judgment at ), Mr Justice Snowden emphasised that the complexity or novelty of the scheme, the degree of prior consultation with creditors, and whether creditors will have a sufficient opportunity to consider the scheme and seek advice, are all matters which will inform the adequacy of the notice period (Judgment at  and ). Where there is real urgency, the period of notice may be reduced significantly, and issues which would otherwise usually be dealt with at convening will have to be considered at sanction (ibid). However, Mr Justice Snowden was clear in his view that, on the facts of the Indah Kiat case, 14 days was insufficient notice: Judgment at . The matters that he relied upon in reaching this conclusion may suggest that 14 days would be regarded as rather short in many cases. He relied upon the complex nature of the scheme, the apparent lack of any urgency requiring a shorter period, and the potential delay that may arise by giving notice through the clearing system (i.e. that the notice has to be passed down a chain of recipients until it gets to the ultimate owner). His suggestion that greater consideration should be given to seeking a stay of enforcement of judgment debts where such liabilities form the basis for urgency (whether in England or in the US: Bluecrest Mercantile BV v Vietnam Shipbuilding Industry Group  EWHC 1146 (Comm)) might suggest that a considerably longer period needs to become the expected standard for many of the large schemes which are being put before the Court (certainly absent real urgency which justifies a shorter period). Subject to the scheme company asking for a longer period, Mr Justice Snowden indicated that he would adjourn the convening hearing for a period of 6 weeks (Judgment at ), thus giving 8 weeks notice between circulation of the Practice Statement letter and the convening hearing.
Evidence in support of the application
There were certain particular features of the evidence which caused difficulties to Indah Kiat, and which are unlikely to apply in many other cases (i.e. the fact that another company in the same corporate group as the scheme company had previously been found to have procured the sanction of the Bermudian court to a scheme of arrangement by relying on perjured evidence concerning the connection between the controlling shareholders of the group and those creditors who supported it: Judgment at -). Mr Justice Snowden emphasised the importance of clearly identifying the sources of information which are relied upon by the scheme company (Judgment at -), as well as “adducing evidence of sufficient quality and credibility to persuade the court to act” (Judgment at ). However, some points of general interest can be identified. First, if reliance is to be placed on the position of a creditor or group of creditors both as regards negotiating and supporting the scheme, and it is suggested that they are independent from the scheme company/the compromise has been negotiated at arm’s length, proper disclosure needs to be given both as to the nature and identity of the creditor(s) so as to enable other creditors to assess whether their support is truly independent (which is potentially relevant to both classes and fairness) : Judgment at - . In particular, Mr Justice Snowden emphasised that connections between the scheme creditors and the scheme company, whilst most likely to give rise to fairness issues for consideration at the sanction hearing, might be relevant to class issues because the connection might affect the court’s assessment of (for example) the rights ultimately being conferred on that creditor under the scheme: Judgment at -. The general commercial reluctance of creditors to be identified may therefore have to give way to the need to provide a full explanation of the circumstances in which the Scheme is being advanced if the scheme company wishes to rely on the involvement of those creditors as a factor supporting the merits of the scheme. Second, the decision in VGG made it quite clear that, in many instances, better evidence of the likely alternative to the scheme, and the financial position of the company and third parties benefitting from release absent the scheme, would be required. As I observed in relation to VGG last summer, in some instances the position will be clear and need relatively little comment/development if the evidence is being used for the sole purpose of demonstrating that the Scheme will produce a better outcome for creditors than the obvious alternative. In other cases, much more may be required. In Indah Kiat, the scheme sought to compromise liabilities under US law governed notes with a face value of US$350 million (Judgment at ). The scheme company was a Dutch company which had claimed to have moved its COMI to England within the three months prior to promoting the scheme (albeit it was pointedly observed by Mr Justice Snowden that the comparator referred to a possible liquidation in Holland: Judgment at ). The Notes were guaranteed by the scheme company’s parent, whose balance sheet recorded “a healthy surplus of in excess of US$2.5 billion” (see Judgment at  and ). The scheme required a release to be given by scheme creditors of their guarantee claims against the parent. Perhaps understandably, the opposing creditor took issue with the fact that there was no clear analysis or evidence that the Parent itself would be forced into insolvency or would be unable to pay the full value of the notes (Judgment at ). The absence of such evidence was clearly material to the creditors’ consideration of the merits of the scheme, and the scheme company conceded at the hearing that the draft explanatory statement and evidence did not contain a full analysis of the position. Third, of interest is the further comment made by Mr Justice Snowden regarding the financial/fairness analysis at , where he said: “I also consider that it should be made clear whether or not the authors of any fairness opinion provided to Scheme Creditors are prepared to accept responsibility to Scheme Creditors for that opinion.” In practice, there is frequently reluctance on the part of the financial advisers to agree to include their actual analysis (rather than a letter summary, or description of their advice) in the materials to be provided to the creditors. Undoubtedly it can be made clear whether there is any assumption of responsibility to creditors. One suspects that what Mr Justice Snowden wants to see is a clearer description of the basis on which any advice is being given to the Company so that creditors can assess the value of that input when considering the Scheme, rather than an express assumption of responsibility to scheme creditors. Fourth, the vexed question of third party releases may need to be given further consideration and explanation in the supporting materials, particularly where the claim against the third party would not given rise to a “ricochet” claim. At  and  of the Judgment, Mr Justice Snowden accepted a criticism of the materials put forward by Indah Kiat as having failed to provide a clear explanation of the releases that would be given to persons other than the scheme company and the parent. Furthermore, he suggested that “some assessment ought to be made of the potential financial effect (if any) of those releases upon Scheme Creditors”. The value of the wide ranging releases sought by advisers and others may in this regard be difficult to quantify, precisely because the releases are sought as belt and braces provisions/to cover unknown claims, rather than specifically identified liabilities. Finally, it is notable that Mr Justice Snowden identified a concern in relation to recognition of the effect of the scheme abroad on foreign judgment liabilities (rather than other commercial liabilities): Judgment at . Where a scheme company has material foreign judgment liabilities which it is seeking to compromise through a scheme, Mr Justice Snowden expects that express consideration will be given in the evidence that will be adduced regarding recognition in the foreign jurisdiction as to whether the foreign Courts would accept that their judgment liabilities were susceptible to being compromised by an English scheme. Ultimately, practitioners in this area should take heart from the guidance being provided by Mr Justice Snowden. The importance of English schemes of arrangement to the international refinancing community is such that, if their integrity and utility is to be preserved, it is critical that the procedure adopted is beyond reproach, and that foreign courts appreciate that the role of the English Court in sanctioning a scheme is far more than a rubber stamp exercise. Mr Justice Snowden’s guidance should assist in ensuring that the market’s current enthusiasm for schemes does not lead to us wounding or killing the golden goose.