Sea Assets Ltd v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PETER GIBSON,LORD JUSTICE LONGMORE,LORD JUSTICE LAWS |
| Judgment Date | 07 November 2001 |
| Neutral Citation | [2001] EWCA Civ 1696 |
| Docket Number | A3/2001/2264/A |
| Court | Court of Appeal (Civil Division) |
| Date | 07 November 2001 |
[2001] EWCA Civ 1696
Lord Justice Peter Gibson
Lord Justice Laws
Lord Justice Longmore
A3/2001/2264/A
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
COMPANIES COURT
(Mr Justice Lloyd)
Royal Courts of Justice
Strand
London WC2
MR LAWRENCE COHEN QC and MR EDWARD DAVIES (Instructed by Gouldens, 10 Old Bailey, London, EC4 7NG) appeared on behalf of the Appellant.
MR MARK PHILLIPS QC and MR RICHARD SNOWDEN (Instructed by Freshfields Bruckhaus Deringer, 654 Fleet Street, EC4Y 1HS) appeared on behalf of the Respondent.
Wednesday, 7th November 2001
This is an application by SEA Assets Ltd ("the Appellant") for permission to appeal against the order of Lloyd J on 4th October 2001. Thereby the judge sanctioned a scheme of arrangement ("the Scheme") under section 425 of The Companies Act 1985 which had been put forward by the respondent, PT Garuda Indonesia ("Garuda"). The judge refused permission to appeal. Chadwick LJ directed that the application be heard on notice to Garuda and that the appeal should follow if permission to appeal were given.
It has been the legislative policy for well over a century to encourage compromises and arrangements between a company and its creditors or members. That has been achieved by the enactment of a statutory mechanism to enable the absence of consent of minority creditors or members to be overcome, provided that a sufficient number of the relevant creditors or members agree with the proposed compromise or arrangement and the court gives its approval. If that occurs, then the dissentient minority will be bound by that compromise or arrangement. That of course in the case of a creditor is an encroachment on his right to be paid what he is owed in accordance with the contractual terms. But the utility of the statutory mechanism is particularly obvious in a case where a company is in financial difficulties but can persuade most, but not all, of the relevant creditors that the company's debts should be restructured rather than that those creditors should exercise their rights, including the right to put the company into liquidation.
The statutory provisions are now contained in Part XIII of the 1985 Act. By section 425:
"(1) Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between the company and its members, or any class of them, the court may on the application of the company or any creditor or member of it order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), to be summoned in such manner as the court directs.
(2) If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement, if sanctioned by the court, is binding on all creditors or the class of creditors or on the members or class of members (as the case may be), and also on the company ".
The information to be supplied to relevant creditors or members if the court orders a meeting under section 425(1) is contained in section 426. By subsection (2):
"With every notice summoning the meeting which is sent to a creditor or member there shall be sent also a statement explaining the effect of the compromise or arrangement ."
I turn to the facts. Garuda is the Indonesian national airline. It is a limited liability company incorporated under Indonesian law and wholly owned by the State of Indonesia. It operates regular flights to and from Gatwick. It is registered in England as an overseas company and there is no doubt but that section 425 can apply to it. It also operates flights and to from Singapore, where it has assets.
In the 1990s Garuda had several loss-making years until 1998 when a new management instituted some operational and financial rationalisations. They resulted in an improvement, but Garuda is unable to meet all its debts for which it is currently liable on the contractual terms. Further, according to its audited balance sheet at 31st December 2000 it has liabilities exceeding its assets. To survive it has to restructure its liabilities. Under Indonesian company law there is no provision comparable to section 425. There is a provision allowing for debt moratoria during which a composition with creditors generally may be put. But that is seen by the directors of Garuda to have at least two disadvantages. In those moratoria the business of the company is managed by a court appointed administrator who cannot be relied on to have had experience of running an international airline. If the composition is not approved by a sufficient majority of the unsecured creditors, the company must be declared bankrupt.
The companies legislation in Singapore contains provisions similar to those found in section 425. The restrictions on the ability of a company to come to an arrangement with its creditors outside bankruptcy led the directors of Garuda to decide against initiating proceedings in Indonesia. It chose to take advantage of the English and Singapore legislation to propose the Scheme and, unusually, to apply to the courts in both England and Singapore for their approval of the Scheme. The Scheme was made conditional on becoming effective in both jurisdictions. If the Scheme is to be effective, a number of conditions must be fulfilled before what is called the Long Stop Date of 15th November 2OO1. They include the certification by the directors of Garuda that no material adverse change in its financial position, as compared with the position set out in the Explanatory Statement prepared and distributed in accordance with the section 426, has occurred.
Garuda has proposed that there should be what is termed a Financial Restructuring of Garuda, of which the Scheme forms a part. The Directors of Garuda say that if the Financial Restructuring is not implemented in a timely manner, they may have no option but to recommend to the Indonesian Government that steps be taken towards the commencement of bankruptcy proceedings in Indonesia, under which the unsecured creditors would only receive, and then after some time, by way of dividend about 27.5% of the face value of their claims. The purpose of the Financial Restructuring is therefore to avoid a bankruptcy and to enable Garuda over time to meet in full its outstanding liabilities to creditors other than to the Indonesian Government and certain state-controlled entities, and to reduce Garuda's overall burden of debt to provide Garuda with a solvent balance sheet and to enable it to have access to new assets.
A crucial element of the Financial Restructuring is support from the Indonesian Government and the state-controlled entities. They are very substantial creditors. I will come shortly to how their debt is to be dealt with. There are also financing creditors in respect of the purchase of six Airbus A330 aircraft which were delivered in 1996 and 1997. Those creditors are secured creditors. There are also secured creditors who are owed monies under leases of two flight simulators. Finally there are other Indonesian secured creditors. All the secured creditors are within the scope of the Financial Restructuring and they are to be dealt with by individual contractual arrangements (which have been called "the Compromises"). The completion of the Compromises is a pre-condition to the Scheme becoming effective. There are also Scheme Creditors, being persons with Scheme Claims, who are described in the Explanatory Statement in this way:
"Creditors whose claims are to be restructured pursuant to the Scheme are the only material Financial Creditors of the Company (other than Government and certain trade creditors) who are unsecured (i.e. do not have formal or informal security from the Company) and whose claims are intended to be restructured pursuant to the Financial Restructuring. These creditors comprise as follows:
(a)holders of certain unsecured promissory notes issued by the Company, denominated in either US Dollars or Rupiah;
(b)creditors whose claim against the Company arises under a US dollar unsecured syndicated term loan facility entered into with the Company; and
(c) creditors whose unsecured claim against the Company arises as a result of the termination by the Company of certain aircraft leases entered into by those creditors in their capacity as lessor or financiers of lessors."
Finally, outside the scope of the Financial Restructuring are two categories of unsecured creditors:
(1)creditors who have claims against Garuda based on procurement contracts for the future supply of aircraft and engines; and
(2)trade creditors (in the sense of suppliers of goods and services on an on-going basis which are regarded as essential to the continuation of Garuda's business as a going concern).
The creditors in each of those categories can readily be seen to be in a strong bargaining position if Garuda is to continue its operations. In effect the Scheme acknowledges that they must be left free to pursue their liabilities, and their debts will be paid in full as they fall due.
The different elements of the Financial Restructuring proposals are these:
(1)Some US $909 million of debt owed to the Indonesian Government is to be converted into equity of Garuda. That has been agreed to unconditionally.
(2)Some US $441 million of debt...
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