Schemes of Arrangement and class composition: common interest or a class act?

This is part four 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.

Background

Lady Wolffe’s recently published, and 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”) provides welcome clarity as to the construction, application and interpretation of Part 26.

The Schemes 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 largely 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 entity forming part of a group of entitles referred to throughout as Asia Research and Capital Management or ARCM. Ltd Group (“ARCM”), but were supported by the Second and Third Respondents (two separate and substantial groups of creditors by value (together the “Supporting Creditors”)), 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 this revised structure, the liabilities under the various 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, and the liabilities owing to the Scheme Creditors exceeding US $2.5 billion, the directors of the two companies, and their creditors, concluded the imminent debt wall must be addressed. It was generally accepted that, absent some form of extension to the existing indebtedness, the Group would be unlikely to be able to refinance its indebtedness in full by the Scheme Maturity Date.

Following consideration of the options available, the directors of the Group issued an Explanatory Statement under section 897 of the 2006 Act setting out the proposed new Schemes.  The principal objectives of the schemes were to extend the Scheme Maturity Date 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.

Composing the classes

A relevant element of the Schemes, at least in so far as it relates to class composition, was the harmonisation of interest rates. If sanctioned, the Schemes would broadly result in a uniform coupon or interest rate of 8.85% on all cash facilities available to the Group.  There were two partial exceptions to this. For those cash creditors who would receive less than the weighted average increase or who would receive a lower rate of interest than they currently receive. Secondly, letter of credit facilities would be increased to 6.94%, on the basis that in the ordinary course of events, when a call is made by a beneficiary under a letter of credit (so that an actual cash advance would be required) the interest rate would also attract LIBOR which would result in the all-in rate increasing to around 8.85%.

At the meeting of the creditors the Petitioners divided the Scheme Creditors in to two classes: the Super Senior Creditors, a class consisting primarily of secured creditors, and the Senior Creditors, a group of various other private creditors and retail bond holders. The Schemes were almost unanimously approved by both classes of creditors – both by value and by number – with turnout in excess of 95% in each case.

Nevertheless, the First Respondent proceeded to oppose the Schemes at the Scheme sanction hearing.

A question of class

One of the challenges raised by ARCM was to the composition of the voting classes. Their position was that the interests of the classes of creditors were not fairly represented at the meeting of creditors, or that the interests of the creditors were so diverse as to make it impossible for them fairly to vote in the classes proposed by Premier Oil.

This challenge was based on the second of the four stages for consideration of a scheme by the Courts as set out in the “Buckley Test”[1]. The second stage of the “Buckley Test” provides that – when considering whether to sanction a scheme of arrangement the Court must consider whether the classes were fairly represented by the meeting and whether the majority were coercing the minority in order to promote the interests adverse to the class whom they purported to represent.

The First Respondent argued that there were various “special interests” that resulted in a materially greater benefit to some creditors from the Schemes when compared to others. This variance was so said to be so material that the Court could not sanction the Schemes on the basis of the votes. The “special interests” included:

1. The extreme variation in benefit for particular creditors arising out of the harmonisation of the interest rates.
2. Certain fees ranging from US $1 million to US $12 million that might become payable to certain of the scheme creditors for collateral services if the schemes of arrangement were to proceed.
3. The Schemes were designed to induce creditors to support the Scheme so they might trade out of their position. This was alleged to be uniquely disadvantageous to ARCM as the Groups’ largest creditor.
4. Proposed changes in voting rights which would, if implemented, give creditor representing the relevant majority control over the documents central to the implementation of the Scheme and, by virtue of this those creditors would have a special interest in voting in favour of the Scheme to receive ultimate decision-making power.

The Court’s Analysis

The Court profoundly rejected the arguments submitted by ARCM and concluded that the classes were appropriate in the circumstances.

Lady Wolffe noted that there was no material difference such as to constitute a special interest when the interest rate harmonisation is considered in combination with the upfront fee. You could not look solely at one aspect or the other, it was necessary to consider the total return that a creditor stood to received. As all Scheme Creditors would receive a higher return than they would in the absence of the Schemes, this acted as a unifying factor rather than to fracture the classes.

The Court opined that while a creditor at the higher end of the First Respondent’s spectrum of variance may vote for the Scheme more enthusiastically, as it would benefit more, its interest would not be adverse to the creditor who is also benefiting, albeit to a lesser degree. They both have a common interest to vote in favour of the Schemes not a special one. Indeed, it was difficult to apply the nomenclature “special” to a universally applicable feature.

Lady Wolffe noted that even if the upfront fee was left out of account, while this would be detrimental to those creditors losing, it would not give them a special interest so as to fracture the classes. In fact, quite the opposite, they would have an interest adverse to the majority who are benefitting. In addition, the vast majority of creditors voted in favour of the Schemes at the creditors meetings, including those whose interest rates would be reduced by harmonisation (if considered without the effect of the upfront fee).

When it came to the fees payable for collateral services, the Court noted that there was no challenge to the amount of the fees as being out of line with the market, the objection was simply that they were to be paid. In addition to finding that the Court found that the fees were in respect of commercial services to be rendered, the court was not persuaded that, but for the fees, the creditors to be in receipt of them would not have voted for the Schemes. In reaching this conclusion Lady Wolffe noted that it was not insignificant that other Senior Creditors not in receipt of such fees or disbursements nonetheless voted in favour of the Schemes.

The First Respondent’s “trading out” argument was based on a passage in the Explanatory Statement that suggested that the schemes would:

“./ . . facilitate a broader and deeper trading market than currently exists, which in turn should have a positive impact on the price of the debt in the secondary market”.

The Court was not persuaded by the First Respondent’s suggestion that it was in a unique position. While ARCM was the Group’s largest creditor its position; there were other creditors holding a substantial amounts of debt who may also find it difficult to trade out. The Court further noted the universal effect of a positive impact on the process of debt in the secondary market would be available to all creditors. Such an effect cannot be a “special interest” if it is universal.

The Court was also persuaded in reaching its decision by the following uncontested factors: turnout at the creditors’ meetings which passed the Schemes was exceptionally high; the range of creditors who voted included some of the largest banks and other entities in the world, with considerable financial experience; no consent fees or other inducements were paid in consideration of signing a support letter or agreeing to vote in favour of the Schemes; there was a broad range of support for the Schemes across every debt instrument; and apart from ARCM, very few other private creditors voted against the Schemes.  The Reporter also concluded that those voting in favour of the Schemes were acting in good faith and the classes were fairly represented.

As to those creditors who, with a 66.6% majority, could make amendments to some of the core Scheme Documents, the Court did not consider this to be a “special interest”. It recounted a number of blocking votes and veto powers that other creditors (including ARCM) already have under the previous scheme and will have under the proposed Schemes. There was no sound basis to argue that there was a discrimination in legal rights or voting power. The proposals ensured equal treatment of the legal voting rights and, although ARCM would no longer have a de facto veto, this did not constitute a “special interest”.

Our view

A key theme in the Court’s decision on the Buckley Stage 2 Test was universality. Where a feature of the Scheme was universally applicable, or there was a common interest in it, the Court did not find the interest was “special”. Even where there was a diversity of interest so as to put the creditors’ interests in competition, this would not make it impossible for the creditors to consult together with a view to their common interests. This need to achieve universality/commonality of treatment amongst creditors should therefore be borne in mind by those considering proposing a Scheme.

Related articles:

Part One: Schemes of Arrangement and Powers of Attorney - implicit in sanction or a fatal “blot”? 

Part Two: Premier Oil: Class Composition

Part Three: Beyond the Buckley Test: Premier Oil and the Anterior Jurisdictional Challenges

[1] as originally envisaged in Buckley on the Companies Acts and which was restated by Snowden J in Re Noble Group Limited (No.2) [2019 BCC 349]