Dtek Finance B.v and Another
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Rose |
| Judgment Date | 28 April 2015 |
| Neutral Citation | [2015] EWHC 1164 (Ch) |
| Docket Number | Case No: No. 2569 of 2015 |
| Court | Chancery Division |
| Date | 28 April 2015 |
[2015] EWHC 1164 (Ch)
Mrs Justice Rose DBE
Case No: No. 2569 of 2015
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Tom Smith QC and Charlotte Cooke (instructed by Latham & Watkins LLP) for DTEK Finance BV
Hearing dates: 24 and 27 April 2015
This is an application by DTEK Finance B.V ('DTEK') for an order under s 899 of the CA 2006 sanctioning a proposed scheme of arrangement between DTEK and holders of the 2015 Notes (as defined below) (the 'Scheme Creditors'), (the 'Scheme'). It is to implement a financial restructuring of DTEK which has run into financial difficulties and is the first step in the proposed restructuring of the wider group of companies.
The background to the Scheme
DTEK is incorporated in the Netherlands and is part of a group which carries on an energy business involving mining coal, generating power and distributing and selling electricity. Its customers are mainly residential and industrial customers in Ukraine but also in Europe and elsewhere.
DTEK's function within the group is to raise finance in the capital markets and distribute that finance to the group. The loan notes which are held by the Scheme Creditors were issued by DTEK and the proceeds were then lent by DTEK to other companies in the group. DTEK's liabilities are therefore limited to its obligations under the notes and its assets are the debts owed to it by the other companies in the group.
The notes which are the subject of the Scheme (the '2015 Notes') were issued in 2010. They bear interest at a rate 9.5 per cent per annum and they mature on 28 April 2015. They are unsecured but are guaranteed by other group companies. The principal amount of 2015 Notes originally issued was $500 million but this was reduced in 2013 to $200 million by DTEK buying back $300 million worth of the 2015 Notes in the market. The 2015 Notes as originally issued were governed by New
York law but are now governed by English law, as I describe below.
The group has run into financial difficulties as a result of problems in the Ukraine. Its main problem has been generated by the devaluation of the Ukrainian currency against the US dollar and the Euro. Between 1 January 2014 and 21 April 2015, the Ukrainian currency, the Hryvnia, depreciated by over 62 per cent against the US dollar. The group earns its revenue in Ukrainian currency but has to service its borrowings in either dollars or euros. It has also suffered as a result of the unrest and violence in Ukraine, leading to disruption of its operations and poor market conditions.
The group intends in due course to undergo a much wider restructuring to put it back on stable footing. Discussions with its bank lenders to achieve this are currently underway. But DTEK faces the immediate problem that the 2015 Notes mature on 28
April 2015 and the company will not have funds to pay them. Absent the Scheme, therefore, there will be an event of default for the purposes of the 2015 Notes and that will in turn trigger defaults under other agreements. This is likely to cause DTEK and some or all of the guarantors to enter into insolvency proceedings.
DTEK has therefore sought to restructure the 2015 Notes with the support of the holders. The Scheme is relatively straightforward:
i) The existing 2015 Notes will be acquired by DTEK and then cancelled.
ii) In return for that, the noteholders will get new notes for 80 per cent of the par value of the 2015 Notes with a 2018 maturity date and same interest rate.
iii) For the remaining 20 per cent of the par value, the noteholders will receive cash.
Permission to convene a single meeting of Scheme Creditors was granted by Nugee J at a hearing on 14 April 2015. That Scheme Creditors meeting was held on 23 April 2015 at 10 am. I have seen the report by the Chairman of DTEK, Maksym Timchenko. He records that 289 Scheme Creditors present or voting by proxy voted for approving the Scheme and none voted against. The value of the 2015 Notes voted in favour was $184,468,000 and none against. The total value of the 2015 Notes is now $200 million. Thus the value voting in favour is either 92.2 per cent or 91.1 per cent, depending whether the votes of noteholders who are affiliated companies are taking into account.
Mr Smith QC appearing for DTEK addressed five topics in his submissions; the court's jurisdiction to sanction the Scheme; whether it was appropriate to convene a single meeting of Scheme Creditors; whether the statutory requirements have been satisfied; whether the meeting convened properly represented the class and whether the Scheme should be sanctioned in the court's discretion.
Jurisdiction
This issue was not addressed at the convening hearing but was addressed fully by Mr Smith before me. DTEK is incorporated under the laws of the Netherlands. The jurisdiction of the court to sanction a scheme of arrangement under section 26 of the Companies Act 2006 arises in respect of a 'company'. A company for this purpose is any company liable to be wound up under the Insolvency Act 1986. A foreign company can be wound up under the Insolvency Act as an unregistered company. The court must in addition be satisfied, before exercising its discretion to approve a scheme, that the company has a sufficient connection with England: see Re Drax Holdings [2004] 1 WLR 1049 per Lawrence Collins J at paragraphs 29 – 30.
DTEK relies on four circumstances here that satisfy the requirement for a sufficient connection between DTEK and the jurisdiction of this court. The first is that the governing law of the 2015 Notes is English law. There is authority holding that where English is the governing law of the debt instruments that are compromised by the proposed scheme, that is a sufficient connection for the purposes of establishing jurisdiction: see for example Re Primacom Holding GmbH [2011] EWHC 3746 (Ch) per Hildyard J at 63 – 64 and In Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch). In Re Magyar Telecom BV [2013] EWHC 3800 (Ch) David Richards J explained the significance of this link when he noted that under generally accepted principles of private international law, a variation or discharge of contractual rights in accordance with the governing law of the contract will usually be given effect in other countries.
In the instant case, the governing law of the 2015 Notes was changed from New York law to English law by a collective decision of the noteholders earlier this month. This came about in the following way. On 23 March 2015, DTEK launched an exchange offer and consent solicitation to the 2015 Note holders. In the exchange offer, DTEK invited the noteholders to agree to terms in line with the provisions of the current Scheme. If 98 per cent of the noteholders had agreed, the exchange could have taken place on a voluntary basis without the need for court approval. In fact only 91.1 per cent of the noteholders agreed – hence this application to the court. The consent solicitation invited the noteholders to agree to certain changes in the terms of the 2015 Notes including a change of the governing law to English law. There is some debate about whether New York law requires a 50 per cent or 90 per cent approval before the change is binding on all noteholders but this does not matter since consent was given to the change by over 90 per cent of the noteholders.
The terms of the 2015 Notes provided for a potential change to the governing law to be agreed by a majority and to bind everyone whether they agreed or not. According to the then governing New York law, therefore, the governing law of the 2015 Notes was changed to English law. According to DTEK's submissions, this occurred pursuant to a supplemental indenture on 9 April 2015, being the date by which over 50 per cent of holders of 2015 Notes had consented to the change to governing law.
Mr Smith showed me the exchange offer documents sent to the noteholders making clear that the purpose of changing the governing law was to create a link with the English court so as to seek approval for a scheme of arrangement under Part 26 of the Companies Act in the event that they failed to win the 98 per cent support needed for the voluntary exchange to come into effect.
Is the connection created with this court by the governing law any less 'sufficient' because it was made for this purpose only shortly before the sanction hearing? A similar situation was considered by Hildyard J in Re APCOA Parking Holdings GmbH [2014] EWHC 3849 (Ch). In that case the governing law had been changed from German to English law by a decision of the majority of creditors where that majority did not include those who opposed the scheme at the sanction hearing. It was submitted to the learned judge that to bind creditors who have not given their consent and who have not chosen English law as the basis of their relationship (and hence the basis for the court's...
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