Beyond the Buckley Test: Premier Oil and the Anterior Jurisdictional Challenges
This is part three of a series of articles addressing points of interest arising from the opinion of Lady Wolffe in the petitions of Premier Oil plc and Premier Oil UK for the sanction of schemes of arrangement under Part 26 of the Companies Act 2006.
You can find the related items listed at the foot of this page.
Lady Wolffe has now handed down her much anticipated opinion in Premier Oil plc and Premier Oil UK limited, one of the very few Scottish cases concerning contested petitions for sanction of two Schemes of Arrangement under Part 26 of the Companies Act 2006 (“Part 26”)(the “Schemes”) and it provided much needed guidance as to the construction, application and interpretation of Part 26.
The Schemes were petitioned for by two Scottish companies. Premier Oil Plc (“PO”), the publicly listed parent company, and Premier Oil UK Limited (“POUK”), the principal operating company of the wider Premier Oil group (the “Group”). The Group focuses on the upstream exploitation of oil and gas assets throughout the world.
The Schemes were vigorously opposed by the First Respondent: a creditor and part of a group of entitles referred to as Asia Research and Capital Management Ltd Group (“ARCM”), but were supported by the Second and Third Respondents (two separate and substantial groups of creditors by value, who appeared at the Sanction Hearing of the Schemes.
A previously sanctioned scheme of arrangement in 2017, amongst other things, put in place a revised capital and debt structure, pursuant to which the liabilities under the group debt arrangements had a single contractual maturity date of 31 May 2021 (the “Scheme Maturity Date”).
In late 2019, with the Scheme Maturity Date growing increasingly closer, the liabilities owing to the Scheme Creditors amounted to about US $2.56 billion (with and total lending commitments at US $ 2.83billion). The PO and POUK directors and their creditors concluded the imminent debt wall must be addressed. It was generally accepted that, absent the Schemes, the Group would be unlikely to be able to refinance its indebtedness in full by the Scheme Maturity Date.
Accordingly, the Group issued an Explanatory Statement under section 897 of the 2006 Act setting out the proposed new Schemes. They were designed to extend the Scheme Maturity to 30 November 2023, allow the funding of ongoing activities and improve the Group’s financial position to facilitate a future refinancing of the Scheme Debt Facilities. One of the essential elements was three proposed material acquisitions of oil or gas producing assets (the “Acquisitions”)
The Schemes were subsequently approved at a creditors’ meeting. Nevertheless, the First Respondent proceeded to oppose the Schemes at the Scheme Sanction Hearing before Lady Wolffe.
The Anterior Jurisdictional Challenges
The usual four stages for consideration of a scheme by the Courts are set out in “Buckley Test”. However, in this case the First Respondent advanced further anterior jurisdictional challenges that went beyond the grounds in the BuckleyTest, as follows:
- The Acquisitions would result in a fundamental change to the Group’s risk profile, materially changing the balance of the Group’s energy production, weighting it significantly more toward gas than oil, and bringing significant decommissioning liabilities. Such novelty in the Schemes took them outside the permissible scope of the Court’s jurisdiction.
- The Schemes impermissibly imposed new obligations on the lenders who provided Revolving Credit Facilities (“RCFs”), in respect of the undrawn facility during the period of the debt extension and which would be on new terms. Notably, they were to permit the borrowers under the Senior RCF to re-designate a proportion of the commitments under the cash facility as an additional commitment under the letter of credit sub-facility.
- The Schemes take but do not give in circumstance where an arrangement properly so called, requires give and take. Notably, the Schemes permanently alter ARCM’s voting rights, depriving or confiscating it of its blocking vote in one of the two creditor classes, which ARCM enjoys by virtue of the amount of debt it holds within two of the creditor classes. This, it was argued, was in circumstances where nothing is received by ARCM in return.
- A scheme can only compromise “pecuniary” rights of a company’s creditor. The approval of the proposed Acquisitions and the proposed confiscation of the voting rights (set out above) are not pecuniary or creditor rights that fall within Part 26. Nor are they ancillary to or necessary to ensure the effectiveness of the compromise of the pecuniary rights. Accordingly, the Schemes go beyond the proper jurisdiction under Part 26.
The Court’s Opinion
Lady Wolffe began her opinion on this matter by making some important and general observations about the role of Court in Part 26 cases. She noted that a petition under Part 26 seeks a sanction of a scheme approved by the creditors at a meeting. It does not seek an adjudication on wider issues such as a comparison of the scheme with alternatives. In this way the role of the Court is not to supplant the commercial judgment of the majority within each class with its own view, nor is the sanction hearing a forum for the detailed forensic examination of the commercial merits of the proposed scheme
The Court must also consider the proposed arrangement as a whole. This informs the assessment proposed scheme against what it is that renders the scheme necessary and whether there is the requisite give and take. Indeed Lady Wolffe said that in complex schemes it is inappropriate to focus on the individual elements of an arrangement where the constituent elements are expressly interconnected and to do so would be to adopt an approach divorced from commercial reality.
The novelty of the acquisitions
In addressing the First Respondent’s first antecedent challenge, Lady Wolff held that novelty itself is not a jurisdictional bar.
She noted that the criticisms by the First Respondent of the merits of the Acquisitions was a question of commercial judgment, which was rightly a matter for the directors of the Group and which had been subjected to scrutiny by the Scheme Creditors in their meetings, who had approved the Schemes overwhelmingly. It was emphasised that disputes about the commercial merits of the Scheme are not apt in Part 26 proceedings.
The Court was also critical of the First Respondent’s failure to have regard to the role of the Acquisitions in the overall scheme of the Schemes. It pointed out that the Acquisitions were not an end in themselves, but were critical to unlocking funding or liquidity.
Do the Schemes Impose New Obligations?
Lady Wolffe rejected the First Respondent’s argument that the Schemes would impermissibly impose new obligations on the RCF lenders by allowing the borrowers, during the maturity extension, to re-designate a proportion of their cash facility commitments as undrawn commitments under the letter of credit sub-facility.
The Court began by noting that the RCF was an established credit facility in which, so long as the credit limit and other conditions were observed, the debtor could drawn down and repay the facility as it chose. It is revolving because the amount due to be repaid at any time would vary and could increase and decrease. The Court found that the maturity extension under the Schemes would simply roll over the existing RCF available to the Group without imposing any new or more extensive obligations on the RCF Scheme Creditors.
In respect of any undrawn amount the RCF Scheme Creditors were contingently liable but were creditors nonetheless because the underlying lending commitments already existed and their obligation to honour the undrawn element of the RCF was an existing, not new obligation imposed by the Schemes, nor was it proposed to be on new terms. Further, the Court held that the re-designation of certain commitments under the Senior RCF would not increase the overall lending commitments of any lender under the Senior RCF. It only substituted some of the re-designated letter of credit facility for the cash facility; it did not become a new debt. In this way no new obligations were imposed at all.
Do the Schemes lack Give and Take
Again, Lady Wolffe rejected the First Respondent’s argument that the Schemes impermissibly took but did not give.
Firstly she found that the First Respondent’s objections lacked jurisdiction. Lady Wolffe referred to the binding authority Scottish Lion which confirmed that provided the statutory majorities were properly obtained and the requisite test of the granting of sanction was satisfied, contractual rights may be varied, notwithstanding the opposition of a creditor affected by those variations. She found that the element of compulsion (or confiscation) the First Respondent objected to (being a change to the Scheme Creditors’ voting rights) flowed from the exercise of the Court’s own powers to sanction the Schemes under Part 26 and that the First Respondent’s objection was not a basis for challenging the exercise of that jurisdiction of the Court under Part 26.
Beyond this Lady Wolffe found that in any event there was give and take. She commented that there was no wholescale removal of voting rights. Moreover, there was no difference between the First Respondent/ARCM and the other Private Creditors in respect of what was “taken” from them. They were each subject to a variation of their rights, which was applied equally to each of the Private Creditor Groups.
Further, there was “give”. It was not the case under a scheme that each individual right of a creditor that is altered or restricted should be counterbalanced by an exactly matching benefit. It was sufficient, as was the case with this Scheme, that all Scheme Creditors were to receive a positive return. They were to benefit from the Acquisitions and would receive an enhanced interest or coupon rate. There was therefore sufficient “give”.
Do the Schemes Go Beyond an Arrangement?
In considering if the approval of the Acquisitions and variation of the voting rights took the Scheme impermissibly outside an “arrangement”, Lady Wolffe began by determining the scope of the word “arrangement” in the context Part 26. She concluded the statutory definition of “arrangement” in section 895 of the 2006 Act was not comprehensive. Further that an “arrangement” was not a word to be considered in isolation but in the context of the statutory phrase “an arrangement between a company and its creditors”. She opined that an arrangement between a company and its creditors must mean an arrangement which deals with their rights inter se as debtor and creditor. A creditor, she said, may have ancillary rights arising from that principal obligation and in more complex arrangements, a significant creditor or the creditors as a collective may be entitled to exert controls over certain decisions or acts of the debtor. The Court commented that a Part 26 Scheme is a form in which such rights may be formalised and imposed, even on dissenting creditors.
In the present case, the Court held that the voting rights in the 2017 Refinancing were conferred on the Scheme Creditors as creditors of the Group. They were an incident of and ancillary to the debt owed to them as creditor. Accordingly, the amendments to the voting rights which the Schemes contemplated were permissible under Part 26.
This element of the Petitions were very informative of the Court’s role. It also provided useful guidance on more novel challenges that were presented by the First Respondent that did not form part of the usual Buckley Test, which although not successful in this case, could still be deployed in other more appropriate cases. It certainly provides food for thought.
Part Two: Premier Oil: Class Composition
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