Mytravel Group Plc and the Companies Act 1985

Hearing dates: 18 th, 19 th and 22nd November 2004

Introduction

This is the hearing of an application by Mytravel Group Plc ("the company") seeking the convening of meetings of shareholders and certain creditors to consider a Scheme of Arrangement under section 425 of the Companies Act 1985. Apart from giving formal and procedural directions, the principal issue arising is as to whether any direction should be given in relation to a meeting of bondholders. Mr Michael Crystal Q.C. appeared for an ad hoc committee of the relevant bondholders; Mr Richard Sheldon Q.C. appeared for the company. The main issue, so far as the company is concerned, is whether or not the bondholders have a sufficient interest in the assets of the company to require them to be given an opportunity to vote at a meeting. The bondholders, as well as joining issue on that point, also take a technical point as to whether or not the proposed arrangement could be brought within the strict wording of section 427 of the Act, whose operation is essential to the scheme as currently propounded.

The Statutory Provisions

Section 425 of the 1985 Act provides (so far as relevant) as follows:

"(1) Where a compromise or arrangement is proposed between a company and 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 or, in the case of a company being wound up, or in administration, of the liquidator or administrator, 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 or, in the case of the company in the course of being wound up, on the liquidator and contributories of the company."

Also relevant to the hearing before me is section 427 of the Companies Act 1985, the relevant provisions of which are as follows:

"(1) The following applies where application is made to the court under section 425 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section.

(2) If it is shown –

a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies , and

b) that under the scheme the whole or any part of the undertaking or the property of any company concerned in the scheme ("a transferor company") is to be transferred to another company ("the transferee company"),

the court may either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters.

(3) The matters for which the court's order may make provisions are-

a. the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company,

b. the allotting or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person.

c. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company,

d. the dissolution, without winding up, of any transferor company,

e. the provision to be made of any persons who within such time and in such manner as the court directs, dissent from the compromise or arrangement,

f. such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out.

(4) If an order under this section provides for the transfer of property or liabilities, then –

a. that property is by virtue of the order transferred to, and vests in, the transferee company, and

b. those liabilities are, by virtue of the order, transferred to and become liabilities of that company;

and property (if the order so directs) vests freed from any charge which is by virtue of the compromise or arrangement to cease to have effect."

An important question has been raised in this case as to whether or not the scheme is a "reconstruction" within the meaning of that section.

Financial state of the company

The company is the holding company of a number of companies incorporated in the UK, Canada, USA, Sweden and a number of other countries. It was incorporated on 3 ^rd December 1962 and for a considerable period of time was known as Airtours Plc until it adopted its present name on 8 ^th February 2002. The group operates in the travel industry – it sells holiday and travel services to the public. It operates both chartered and non-chartered tours, has its own fleet of leased aircraft, operates a low fares airline and has a portfolio of hotels. The current position is that the business is carried on by subsidiaries; the company does not trade. The UK part of the operation is regulated by the Civil Aviation Authority ("The CAA"), which licenses the operating company by Air Travel Organisers' Licenses ("ATOL's") and operating licences for aircraft.

Over the past two or three years the company has made considerable losses which have brought it to its present insolvent position. It is unnecessary for me to go into the details of how it got there. It is sufficient for present purposes to note that the group's net liabilities as at 31 ^st March 2004 were £877.6 million. Steps have been put in train to improve the performance of the company, and it is believed that it is close to breaking even during the year to 31 ^st October 2004. Nevertheless, unaudited projections of the consolidated balance sheet still show consolidated net liabilities of £867.4 million as at that date.

The company has four major finance facilities. They are as follows:

i) A £250m multi-currency credit facility agreement. The term of this facility has been extended and the due date is now 31 ^st May 2006. It is fully utilised.

ii) A US$100m private placement of unsecured loan notes constituted by an agreement dated 31 ^st July 2001. The maturity date (having been shortened by the agreement) is now 31 ^st May 2006.

iii) A £400m bonding facility made between the company and various banks and sureties. This is to provide bonds and guarantees to third parties (among other things for regulatory purposes). The maturity of this facility has been extended to 31 ^st May 2006.

iv) Various bilateral facilities for letters of credit, guarantees and other instruments for a total amount of £168 million.

v) There is a significant number of other financing arrangements such as some financing leases for aircraft and ships, amounting to about £1 billion.

vi) On 21 ^st December 1998 the company issued 5.75% subordinated convertible bonds due on 5 ^th January 2004. By virtue of an agreement reached in September 2003 the maturity of these bonds was extended to 5 ^th January 2007 and the coupon was increased to 7%. It is the holders of some of these bonds who have appeared before me represented by Mr Crystal. They are subordinated by a provision in clause 3 of the Trust Deed which reads as follows:

"If any order of a court of competent jurisdiction is made or any effective resolution is passed for the winding up of the company, the company shall, if and to the extent requires to make a payment only to the extent of such amounts as would have been payable if the holders of the outstanding Original Bonds had, on the day immediately proceeding the date of commencement of the winding-up become holders of shares in the company of a class having a right to receive… in a winding-up of a company (in priority to the holders of all other classes of shares in the company issued or to be issued) an amount equal to the redemption monies and/or unpaid interest expressed to be payable in respect of the Bond up to but excluding the date upon which the holders thereof are treated as having become holders of the shares in the company as aforesaid…"

The main assets of the company are its investments in its subsidiaries and certain sums due from some subsidiaries. There are other assets but they are of no significant value (for present purposes). Its liabilities, in addition to liabilities under the facilities referred to above, are significant sums owed to subsidiaries (£1.7 million as at 30 ^th September 2003) and certain off sheet balance sheet contingent exposures financing, debt and bonding liabilities. There are contingent liabilities under this latter head in a sum exceeding £400 million. There are some other guarantees in respect of the liabilities of various subsidiaries, and the company is party to a number of hedging contracts which are likely to lead to an aggregate net liability of £1.6 million. Trade liabilities amount to £6.8...