Smile Telecom Holdings Limited (the company), a company incorporated in Mauritius but whose COMI is in England, is the holding company of a group of internet and telecommunications companies operating in Tanzania, Nigeria, Uganda and the DRC. As part of the company’s restructuring plan sanctioned in 2021 (RP1), there was a $62 million injection of super senior funding by 966 CO. S.à rl (the Super senior lender). The new funds were advanced on the one hand to implement a solvent sale of the Group’s activities in Tanzania, DRC and Uganda, and on the other hand to implement a business plan for the Nigerian activity of the group with a view to its sale in the medium term in an orderly manner. Sanctioning RP1 last year saw one of the first uses of the new cross-class cram-down mechanic.
Unfortunately, the company has had limited success with its solvent phase-out program. This, combined with continued difficult trading conditions and the maturity of the super senior financing provided under RP1, means the company needs further balance sheet restructuring to allow sales to continue on a solvent basis.
The convening hearing for a second Part 26A restructuring plan (RP2) took place on 12 January 2022 and is the first to include a request under section 901C(4) of the Companies Act 2006 to exclude a class from voting on the restructuring plan. At the hearing, the company argued that only one class (including the senior super lender) out of eight classes of creditors and members should have the right to vote on the proposed plan, because all other classes, including senior secured lenders and all other secondary stakeholders, had no economic interest in the business, with value breach within the Super Senior debt in the event of a relevant alternative which was insolvency of the business and its subsidiaries.
The restructuring plans the courts have considered in 2021 have largely focused on the new cross-class enforcement tool under section 901G(4). This power uses the “not worse off” test to allow dissenting classes of creditors to be “crammed in” or bound by a restructuring plan provided that at least one class votes in favor of the plan and none of the members of the splinter class either “worse off than they would be in the event of a relevant alternative”.
Section 901C(3) provides that “Any creditor or partner of the company whose rights are affected by the compromise or arrangement must be allowed to participate in a meeting convened [by the court]” However, under Section 901C(4), a company proposing a restructuring plan may ask the court to exclude a class from the voting arrangements where “the court is satisfied that none of the members of this group has a genuine economic interest in the company.” This goes beyond cram-down between classes and removes the possibility for the class concerned to vote on proposals. There is a higher threshold to meet to pass the 901C(4) test compared to 901G(4), namely that the company must demonstrate that the class concerned has a complete lack of interest economics in the business, rather than satisfying the court that the creditor is no worse off under the plan than under the relevant alternative.
Ultimately, the question comes down to valuation and whether or not the company can demonstrate that a class is entirely out of the money. In support of the claim, evidence provided to the court by the company included an assessment by FBNQuest (albeit on a confidential basis only to the court and participants in the restructuring plan subject to confidentiality agreements) of the Nigerian company (considered to be the group’s only asset of significant value) which showed that at best the proceeds would be insufficient to repay the super senior lender in full. Without the restructuring plan, the assets would be sold through an insolvency process, generating proceeds that would only repay the lead super lender, under the cascade of payments provided for in the intercreditor agreement, without surplus of this business or other non-essential assets remaining to be repaid. Senior lenders or more junior creditors. This was also supported by a statement of estimated results (EOS) produced by Grant Thornton UK LLP.
In his judgment, Judge Miles, referring to the obiter comments of Snowden J in In Virgin Active Holdings Limited and Others  EWHC 1246 (Ch), said that in considering whether a creditor had a real economic interest in the company, the court must consider the “relevant alternative” for the company if the plan were not sanctioned, and the court should deal with the question by applying the civil standard of balance of probabilities.
The court noted that with respect to a 901C(4) claim, it could decide that the evidence was not sufficiently complete or satisfactory to enable the court to form a proper opinion, e.g. when insufficient notice of the claim had been given to other stakeholders or when objections were raised by creditors that the court determined required further time or investigation. However, the judgment confirmed that when the court was convinced by the evidence that none of the members of the group concerned had a genuine economic interest, then it was open to the court to conclude that there was no reason to demand a meeting of this group. Therefore, the court issued an order under Section 901C(4), directing that the primary superlender be the only voting class.
In granting the 901C(4) order, Judge Miles confirmed that he was satisfied that the Super Senior Lenders were the only class of creditors with a real interest in the company. He confirmed that in reaching this conclusion, he considered the following factors:
- the expertise by a notorious appraiser (whose appointment had been accepted by the Senior Lenders), who had been communicated to the parties concerned and had been questioned by the Senior Lenders,
- the EOS, carried out by a reputable professional firm, had been reviewed by the Principal Lenders and showed that the Principal Lenders were clearly short of money,
- the discount applied by Grant Thornton UK LLP in the EOS was within the normal range for distressed selling,
- there had been a genuine M&A process regarding the assets by an experienced party, which had led to offers for the assets demonstrating that the value had been well located in the super senior debt and that the M&A process had been followed by PwC on behalf of the Principal Lenders, and
- all parties had been duly notified of the convening of the hearing, including the 901C(4) application, and none had sought to introduce evidence to the contrary at the hearing.
The sanction hearing is scheduled for Thursday, February 17, 2022. If RP2 is sanctioned, stakeholders other than the Senior Super Lender will have their debts and shareholder rights fully compromised (although some ex gratia payments will be made) without have had the opportunity to vote on the proposals. While stakeholders may still be able to make representations at this sanction hearing, they have lost the right to “vote with their feet” by voting against the proposals and they may face an uphill battle if they want to. oppose RP2 at this point.
Yesterday’s decision demonstrates that the court is prepared to use 901C(4). It is a powerful tool that can be used to disenfranchise creditors and class members early in the restructuring plan process. In this case, this will result in a single class meeting, with only one creditor in that class. If there is a clear valuation case, a company considering a restructuring plan may now be encouraged to try 901C(4) as it gives creditors and members less time to mount a valuation challenge. only if these issues were tested in the context of a forced application to the sanction. However, this was a situation where there was clear and substantiated evidence that the only creditor with a continuing economic interest in the business was the senior super lender. Other cases where the valuation evidence is less persuasive, or where there is a credible challenge to the plan company’s valuation evidence, may be less clear under 901C(4) and the courts may prefer to turn to the cross-class cram down mechanism instead. Whichever path is taken, the battleground of evaluative evidence and the relevant alternative will always remain at the heart of these cases.
The Hogan Lovells restructuring team in London acted on 5 of the 10 restructuring plans that were heard in 2021, including Virgin Active, NCP and Smile Telecoms.