KCA Deutag UK Finance Plc v the Companies Act 2006
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Snowden |
| Judgment Date | 05 November 2020 |
| Neutral Citation | [2020] EWHC 2977 (Ch) |
| Court | Chancery Division |
| Docket Number | Claim No: CR-2020-003944 |
| Date | 05 November 2020 |
[2020] EWHC 2977 (Ch)
Mr. Justice Snowden
Claim No: CR-2020-003944
IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS OF ENGLAND & WALES
INSOLVENCY AND COMPANIES LIST (ChD)
The Rolls Building
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
Mr. David Allison QC and Mr. Adam Al-Attar (instructed by Allen & Overy LLP) appeared for the Applicant.
APPROVED JUDGMENT
Introduction
This is the application by KCA Deutag UK Finance plc (“the Company”), for an order sanctioning a scheme of arrangement (the “Scheme”) between the Company and its “Scheme Creditors” (as defined in the Scheme) pursuant to Part 26 of the Companies Act 2006. The Scheme has received overwhelming support of over 99% of Scheme Creditors and is not opposed by the only creditor who voted against the Scheme at the court meeting.
In those circumstances and without intending any disrespect to the very full and detailed submissions which I have received from Mr. Allison QC and Mr. Al-Attar, I shall be brief.
The background to the Scheme was set out in some detail in paragraphs 2 to 18 of the judgment of Mr Justice Trower following the convening hearing: see [2020] EWHC 2779 (Ch). I shall not repeat it at any length.
The Company is incorporated in England and Wales. It is a finance company in the KCA Deutag group which is a market-leading international drilling, engineering and technology group, serving both onshore and offshore drilling markets. The group operates in more than 15 countries, with a strong presence in Europe (including in the North Sea), Russia (including in the Caspian Sea), Africa and the Middle East.
The company has its centre of main interests (COMI) in England. A substantial number of the Scheme Creditors are domiciled in the UK. Following a change in accordance with the then governing law (New York law), the relevant financing documents constituting the debt to be compromised under the Scheme (the “Scheme Debt”) are now governed by English law and have choice of forum clauses in favour of this court.
The combined impact of the COVID-19 pandemic and the OPEC-related oil price reduction on the group and the wider market has meant that the group is unable to meet its ongoing liquidity requirements and to address a decline in its EBITDA without a material reduction in its debt. That is the purpose of the restructuring of which the Scheme forms the central part.
The Scheme relates to approximately $2 billion of financial indebtedness under a variety of instruments owed by the Company and its affiliates. That Scheme Debt will be released in exchange for $500 million of new senior secured notes (“New Notes”) and what will initially be 100% of the ordinary shares to be issued by a new Jersey holding company (“Jersey newco”), which will become the ultimate holding company of the Company. The new debt and equity will be allotted to Scheme Creditors pro rata to the financial indebtedness owed to those Scheme Creditors.
That 100% equity ownership of Jersey newco by Scheme Creditors might be reduced in certain circumstances in the future by the issue of up to 5% of the equity under a management incentive scheme, or the issue of up to a further 10% of the equity following the exercise of warrants to be issued under the wider restructuring to certain “Participating Shareholders” of the Company's ultimate parent company. I will return to those matters in due course.
Following the restructuring, the group will have a strengthened balance sheet. Its total debt will be reduced by approximately $1.4 billion, meaning it will have a net leverage of 1.4 times its asset value, compared to its current net leverage of 6.3 times its asset value.
In addition to the debts owed to the Scheme Creditors, there are two ancillary facilities of about $60 million, which are not to be compromised by the Scheme but will instead be restructured by bilateral arrangements. There are also certain other term loans and hedging arrangements which will not be compromised by the Scheme.
The evidence indicates that the alternatives to the Scheme and the proposed restructuring would either be a distressed, accelerated sale of the individual business units within the group; or a formal liquidation process of the whole or of those parts of the group that could not be easily sold.
Deloitte have modelled the likely realisations in these different scenarios and have concluded that Scheme Creditors would be likely to recover between 49% and 59% of the Scheme Debt owed to them in the event of a distressed, accelerated disposal of the business units of the group; and would be likely to recover only between 27% and 38% of the Scheme Debt owed in the event of a formal liquidation of the group's assets following a cessation of business.
Deloitte have also prepared a going concern valuation of the group, on the assumption that the business is no longer in financial distress. This indicates that an estimated enterprise value, on a cash-free and debt-free basis, is in the range of $1.2 billion to $1.5 billion. Based on this estimated enterprise value, the indicative post-restructuring value of the shares and New Notes in Jersey newco is estimated to be 69.7% of the Scheme Debt immediately after the Scheme becomes effective, with the potential, as a result of a subsequent increase in the value of the equity, to rise to 100% or more thereafter.
In the convening judgment, Mr. Justice Trower ordered a single class meeting of Scheme Creditors. The evidence establishes, to my satisfaction, that the Company complied with the convening order. The court meeting was held on 30th October 2020, without any problem, by electronic means. The meeting was attended, in person or by proxy, by 189 creditors, representing 96.96% by value of the Scheme Creditors who were entitled to vote. Of those, as I have indicated, all but one Scheme Creditor voted in favour. That represented a vote of 99.47% in number and 98.97% by value to approve the Scheme.
The approach to sanction
Against that background, the Company now seeks the court's sanction for the Scheme. The relevant principles which are applied at this stage of the process were conveniently summarised by Mr. Justice David Richards, as he then was, in Re Telewest Communications plc (No. 2) [2005] 1 BCLC 772, at paragraphs [20] to [22] as follows,
“20. The classic formulation of the principles which guide the court in considering whether to sanction a scheme was set out by Plowman J in Re National Bank Ltd [1966] 1 All ER 1006 at 1012, [1966] 1 WLR 819 at 829 by reference to a passage in Buckley on the Companies Acts (13th edn, 1957) p 409, which has been approved and applied by the courts on many subsequent occasions:
‘In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with; secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might...
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