Highberry Ltd and Another v Colt Telecom Group Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lawrence Collins,THE HON MR JUSTICE JACOB,Mr Justice Jacob,MR JUSTICE JACOB |
| Judgment Date | 20 December 2002 |
| Neutral Citation | [2002] EWHC 2815 (Ch),[2002] EWHC 2503 (Ch) |
| Docket Number | 6972 of 2002,Case No: 6972 of 2002 |
| Court | Chancery Division |
| Date | 20 December 2002 |
In the Matter Of
Colt Telecom Group PLC
[2002] EWHC 2503 (Ch)
Mr Justice Lawrence Collins
6972 of 2002
IN THE HIGH COURT OFJUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Richard Sheldon QC and Ms Hilary Stonefrost (instructed by Slaughter & May) for the Respondent
Mr Malcolm Davis-White (instructed by Cadwalader) for the Applicants
Approved by the Court for handing down
I direct that pursuant to CPR PD 39 para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
I Introduction
This is an unusual application for disclosure of documents, the provision of information, and directions for cross-examination in an unusual petition for an administration order presented against COLT Telecom Group plc ("COLT"). The Petitioners are Highberry Ltd and Highberry LLC. The Petitioners hold approximately £75m (or US$ equivalent) face value of Notes issued by COLT.
The Petitioners' case is that COLT is, or is likely to become, both cash-flow and balance sheet insolvent and that an administration order would be likely to achieve relevant purposes under section 8 of the Insolvency Act 1986, namely the survival of the company and the whole or some part of its undertaking and/or a compromise under section 425 of the Companies Act 1985.
The Petition is unusual in that the Petitioners claim that COLT is or is likely to become insolvent notwithstanding that COLT is a constituent member of the FTSE mid-250 index and has a market capitalisation of in excess of £550 million, that its latest balance sheet shows net assets of £977 million, and that the various series of Notes issued by COLT are not in default and do not fall due for repayment until the period 2005 to 2009. Against that, the Petitioners have in their proposals to COLT have relied on the dramatic fall in its share price since the year 2000, and on its substantial operating losses and negative cash-flows.
Not only is the Petition unusual (and indeed has features in common with corporate litigation in the United States) but the present application is unusual (and probably unprecedented) in that the Petitioners seek disclosure of documents and information, and cross-examination of witnesses (including expert witnesses), on the basis that, because there will be a dispute as to the solvency of COLT on the hearing of the petition, disclosure and cross-examination will be necessary to test the evidence put forward by COLT and to resolve the dispute as to its solvency. The application therefore raises some important questions of principle on the approach to be taken where there are contested issues of fact in insolvency proceedings of this kind.
II COLT and the Petitioners
COLT is the holding company of a group of companies ("the Group") whose trading operations are carried on by its subsidiaries. The Group's business was established in 1992 and COLT became the holding company in 1996. The business of the Group comprises the provision of advanced telecommunications services to business and government customers across Europe.
The Group employed just under 5,000 people as at the end of September 2002. Its annual turnover is in excess of £1 billion. COLT's balance sheet as at September 30, 2002 shows assets totalling £2.6 billion, creditors totalling £1.5 billion, net assets of £977 million and cash balances of £455 million. At that date, the Group had aggregate cash balances of £978 million.
COLT's assets consist primarily of cash held by it and investments in its subsidiaries comprising shareholdings in, and long term funding to, those subsidiaries. COLT's liabilities consist principally of its indebtedness on the nine series of Notes issued by it between 1996 and 1999. COLT's business has also been funded by raising equity capital totalling over £2 billion, the most recent being of about £500 million in December 2001.
Highberry Ltd is an English company which was incorporated in November 2001, and Highberry LLC is a Delaware corporation which was incorporated in September 2002. COLT says that the Petitioners are part of an American group called the Elliott Group, which is controlled by Mr Paul Singer, the father of Mr Gordon Singer, a director of Highberry Ltd and the person who verified the Petition. According to COLT, the Elliott Group is a "vulture fund," which specialises in the taking of "short" positions in shares of a company (in the expectation of a drop in their value) and acquiring debt securities at a discount (in the hope that their price will rise).
COLT says that the Petitioners have acquired Notes in the market at various times as recently as September of this year at a discount from their initial principal value. There are no outstanding sums due on the Notes held by the Petitioners and the earliest date (in the absence of a declaration of default) on which the principal sum is due to be repaid on Notes held by the Petitioners is 2006. COLT says that it believes that the administration petition is part of the strategy of the Petitioners is to make a speculative profit from its acquisition of Notes at a discounted price, and also from their (or their affiliated companies') short position on COLT's shares and that the Petitioners are seeking to achieve the profit by forcing an unjustified transfer of value from shareholders to noteholders.
III The Notes and the "no-action clause"
The total outstanding value (initial principal) of the nine series of Notes issued by the Company is £1.1 billion. The Notes are long term and are not due to be repaid until various dates between 2005 and 2009. COLT has paid all its interest obligations to date on the Notes on time and in full.
The Notes are governed by New York law, and contain the following "no-action" provisions:
"SECTION 6.6 Limitation on Suits A Holder may not pursue any remedy with respect to this Indenture or the Notes unless:
(a) the holder gives to the Trustee written notice of a continuing Event of Default;
(b) the Holders of at least 25% in aggregate principal amount at maturity of Outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense (including the reasonable fees and expenses of its counsel);
(d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and
(e) during such 60-day period, the Holder of a majority in principal amount at maturity of the Outstanding Notes do not give the Trustee a direction that is inconsistent with the request
SECTION 6.7 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any holder to receive payment of principal of, premium, if any, or interest on a Note or to bring suit for the enforcement of any such payment, on or after the due date for such payment expressed in the Notes, is absolute and unconditional and shall not be impaired or affected without the consent of such Holder."
No-action clauses in bond issues have a very long history, and have even been the subject of discussion in the International Court of Justice (although not the subject of decision) in relation to insolvency proceedings brought directly by bondholders: Belgium v. Spain (Barcelona Traction case), 1970 ICJ Rep 3, 104–5, per Judge Sir Gerald Fitzmaurice QC. They are also the subject of many decisions in the United States, and also in Canada, where the most recent appears to be Casurina Limited Partnership v. Rio Algom Ltd., Ontario, August 22, 2002.
COLT has adduced evidence from a partner in the eminent New York law firm, Cravath, Swaine & Moore, to the effect that these provisions would be effective to prevent the maintenance of proceedings such as these. The Petitioners propose to serve evidence in reply later today. In the course of the present hearing I expressed the view that this point might have formed the basis of an application to strike out the petition, or of an application for a preliminary issue. If COLT is right on the point, it would have been a complete answer to the petition and might have rendered unnecessary the extensive (and no doubt expensive) evidence on the financial affairs of COLT.
But I was informed that the issue has not been taken as a preliminary point because in response to COLT's announcement in accordance with Stock Exchange Listing Requirements of the Petitioners' threat to present an administration petition, the Petitioners published their views which included a statement that "Highberry believes that the insolvency of COLT is inevitable". In the light of the Petitioners' public statement and the allegations as to insolvency made in the Petition, COLT wishes to see off the Petitioners' attack in public in order to reassure its customers and the market.
IV The issues on the Petition
The main issues are on the Petition are these. The first is whether as a matter of New York law (the law governing the Notes), the terms of the no-action clauses in the relevant indentures creating and regulating the Notes prevent the Petitioners bringing these proceedings. The second is whether COLT is or is likely to become insolvent. The remaining issues (which are not relevant for the purposes of these applications) will be whether the making of an administration order would be likely to achieve either of the statutory purposes mentioned in the Petition, and whether as a matter of discretion an administration order should be made.
On insolvency, the Petitioners rely upon the rule 2.2 Report of Mr Heis of...
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