The English High Court has convened separate creditor meetings in the first Part 26A restructuring plan to involve only two pari passu ranking creditors, with one of the creditors opposing the plan.  Each creditor will be the only entity at their respective meeting. All eyes will be on the sanction hearing to see how the Court will address the fairness issues in a case like this where the plan company seeks to compromise the liabilities of pari passu creditors in full where the liabilities arise under the same financial instrument, and the creditors receive significantly different consideration in the plan.  In this case, one creditor will receive minimal consideration or capped uncertain future returns, whilst the other creditor, who is providing new money (and is also the group’s shareholder), will retain its 100% shareholding and the benefit of an intercompany debt against the operating subsidiary.

If sanctioned, Mauritian incorporated Madagascar Oil Limited (“MOL”)’s restructuring plan will see BMK, also MOL’s shareholder, cram across Outrider, and will provide for Outrider’s exit from the capital structure following years of compromise negotiations and threatened insolvency proceedings.

At the opposed convening hearing of MOL’s restructuring plan, Mr Justice Mellor dealt with some novel issues and, as is becoming the norm in contested Part 26A restructuring plan cases, raised concern with the large amount of material being delivered to the opposing creditor only just before the convening hearing.  The Judge ordered a case management conference to be held to determine the permissible grounds of objection by the opposing creditor and give other directions in relation to the sanction hearing, the first time this has been done in the context of a Part 26A restructuring plan. This follows the Court of Appeal’s criticism in Adler and Thames Water of the parties’ management of contested restructuring plan cases. 

Compromise and New Money under the Plan

The proposed plan will compromise in full the liabilities of MOL and its Madagascan incorporated subsidiary, Madagascar Oil S.A (“MOSA”) to BMK and Outrider under an English law guarantee of a facility granted to the previous owner of the Group.  BMK, having acquired its shares in MOL out of the Bermudan provisional liquidation of the former shareholder, will also release in full an intercompany loan owed to it by MOL.  In return:

• BMK will receive USD1 for each release under the guarantee claim and one ordinary share of USD1 in MOL.     

• Outrider will receive from MOL either USD200k or 1.25% of the Net Revenue of MOSA (capped at USD1.5m) for a period of up to 12 years, plus USD1 from MOSA.  This equates to a dividend of 0.3% of Outrider’s debt or an entirely speculative return of a maximum of 2% of Outrider’s debt. In addition, Outrider is being offered a “Restructuring Surplus Payment”, which represents 19% of the cash freely available for distribution by MOSA, MOL or BMK upon a listing, disposal or change of control within 3 years after sanction. 

• BMK will provide new facilities to allow MOSA to restart oil production at a large but difficult to exploit oilfield in Tsimiroro in Madagascar.

The Opposed Convening Hearing Issues

The fairness of the plan will be decided at sanction, but three key points came out of the convening hearing judgment:

• Adjournment for late notice and delivery of documents: the Judge decided not to consider Outrider’s application for an adjournment until he had heard the arguments on all the convening hearing issues.  After doing so he concluded Outrider and its counsel were not at a disability in dealing with the convening issues in spite of receiving the explanatory statement, restructuring plan, business plan and relevant alternative report one clear business day before the hearing, but warned it was unwise of MOL to push matters so close to the wire, serving a large  amount of material only just before the convening hearing: in future the Court may not be sympathetic. 

• All give and no take: Outrider raised the novel argument that the threshold Condition B of s901A(3) (i), which requires the company to propose a “compromise or arrangement” with its creditors, was not satisfied as regards BMK, as the plan solely required “give” from BMK in the form of it providing funding to enable production at the Oilfield to restart, and no “take”. In rejecting this argument, the Judge found there was ample take by BMK, who would only be prepared to make further investment if it was confident of securing a return and recovering value in its shareholding. BMK also benefitted significantly from the releases in the plan.  There was therefore ample give and take.

• Single meeting: Outrider argued that the Court should convene a single meeting on the basis of the rights between the two creditors not being so different as to make it impossible for them to consult together with a view to their common interest.  The Judge ordered two meetings for the following reasons:
  • the creditors’ rights going into the plan were similar: the relevant alternative is a Mauritian liquidation of MOL in which BMK and Outrider rank pari passu. However, the rights afforded to them both in the plan (the “rights out” of the plan) were very different: BMK is putting in new money and being locked into the Group’s capital structure and the bulk of its debt written off to support the Group.  Outrider is being offered a better exit from the Group’s capital structure than it would get in a Mauritian liquidation;
  • the negotiations that had occurred to date indicated the parties were unable to find any common ground; and
  • if he were to order a single meeting, it would kill the RP, since it seemed inevitable that the requisite majorities would not be achieved such that the RP could never reach sanction stage.

The case follows Sino Ocean where the Court sanctioned a restructuring plan involving a “cram across”.