Nostrum Oil & Gas Plc (“the Company”)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Meade |
| Judgment Date | 30 June 2020 |
| Neutral Citation | [2022] EWHC 1646 (Ch) |
| Docket Number | Case No: CR-2022-001793 |
| Court | Chancery Division |
[2022] EWHC 1646 (Ch)
Mr Justice Meade
Case No: CR-2022-001793
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
David Allison QC and Ryan Perkins instructed by White & Case LLP appeared on behalf of the Company
Hearing date: 20 June 2022
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic. This Judgment was handed down remotely by email circulation to the parties' representatives and release to the National Archives. Deemed date for hand-down: 30 June 2022.
Introduction
On 20 June 2022 I heard an application by Nostrum Oil & Gas plc (“the Company”) to convene a single meeting of certain of its creditors (“the Scheme Creditors”) for the purpose of considering and, if thought fit, approving a scheme (“the Scheme”) of arrangement under Part 26 of the Companies Act 2006 (“CA 2006”).
The Scheme relates to two series of unsecured notes (“the Existing Notes”), with aggregate principal amount of approximately US$1.125 billion.
At the hearing, I made an Order convening a meeting with other directions relating to it, in substantially the form sought by the Company. I said I would give written reasons, and this judgment contains them. This judgment draws extensively on the Company's very helpful skeleton argument in describing the facts and background.
The Company was incorporated in England and Wales in 2013. Its shares are listed on the Main Market of the London Stock Exchange. It is the ultimate parent of a corporate group (“the Group”) which operates an oil and gas business in Kazakhstan. The largest shareholder of the Company is ICU Holdings Limited (“ICU”).
The key operating company within the Group is an entity called Zhaikmunai LLP (“Zhaikmunai”). Zhaikmunai holds a licence in relation to an oil and gas field in Kazakhstan (“the Chinarevskoye Field”), granted by the Ministry of Energy of the Republic of Kazakhstan.
The Chinarevskoye Field is currently the Group's sole source of revenue, but production has been falling since 2017 and is expected to continue to fall as reservoirs are depleted. As a result of several write-downs of the Group's reserves, it has emerged that the Group is seriously over-leveraged and restructuring is needed.
The Company's main indebtedness arises from the Existing Notes, which comprise two series of notes: (i) the “2022 Notes”, which were issued in July 2017 and are due to be repaid in full on 25 July 2022; and (ii) the “2025 Notes”, which were issued in February 2018. The 2022 Notes pay a coupon of 8% per annum and have an aggregate principal amount of US$725 million. The 2025 Notes pay a coupon of 7% per annum and have an aggregate principal amount of US$400 million.
The Existing Notes are unsecured and are guaranteed by various companies within the Group (“the Guarantors”). They are listed on the Irish Stock Exchange.
The Group failed to make interest payments under the Existing Notes in July 2020, did not remedy the failure within the permitted period, and has paid no interest since. I give further details of this below.
Proposed scheme
The Existing Notes are issued in the form of a “Global Note”: a single global note is issued for the entire face value of each series, and beneficial interests in each Global Note are traded through the Depository Trust Company (“the Clearing System”). The participants in the Clearing System maintain book-entry accounts to which interests in the Existing Notes are credited. The “Noteholders” are the holders of such book-entry interests in the Existing Notes. As the Noteholders are entitled to call for the issuance of “Definitive Notes” in certain circumstances under the Existing Indentures, they are deemed to be contingent creditors for the sums due under the Existing Notes and are therefore treated as Scheme Creditors to ensure that the persons with the relevant economic interest are enfranchised when voting on the proposed scheme.
The principal purpose of the Scheme is to allow for the implementation of a comprehensive financial restructuring of the Group (“the Restructuring”). It is worth briefly setting out the development of the Restructuring:
a. Since May 2020, the Group has been engaged in discussions concerning the potential terms of the proposed scheme with an ad hoc group of Existing Noteholders (“the AHG”) and with ICU.
b. On 24 July 2020, the Group failed to pay interest due under the Existing Notes and did not remedy the default within the 30-day grace period. No further interest has been paid on the Existing Notes since that date, resulting in a series of defaults under the Existing Notes.
c. On 23 October 2020 various Group companies entered into a temporary forbearance agreement with the members of the AHG. A further agreement was entered into on 19 May 2021, which was extended on several occasions. On 23 December 2021, an agreement in principle was reached as to the terms of the Restructuring, and a lock-up agreement was executed (“the Lock-Up Agreement”). The Lock-Up Agreement has now been signed by Noteholders representing approximately 77.7% of the aggregate principal amount of the Existing Notes.
d. On 29 April 2022, the Restructuring was approved by a special resolution of the Company's shareholders.
The immediate effect of the Scheme will be to impose a moratorium on any enforcement action by the Noteholders to allow the Company to implement the Restructuring by obtaining certain regulatory approvals (which I deal with below). The moratorium is intended to remain in place until the date when the Restructuring is completed, or until a long-stop date of 16 December 2022. There is also a mechanism whereby a majority in value of the Scheme Creditors can terminate the moratorium and indeed the Scheme.
There are certain regulatory approvals that the Company must obtain in order to implement the Restructuring, which arise due to certain of the Scheme Creditors being direct or indirect targets of sanctions in the UK, EU or US. Such Scheme Creditors (“the Sanctions Disqualified Persons”) are currently prohibited from dealing with the Existing Notes. Approximately 7.1% by value of the Notes are held by Sanctions Disqualified Persons.
The Restructuring may require licences to be granted by the sanctions authorities in the UK, the Netherlands and the US. I understand from Mr Allison QC, who appeared for the Company, that there is a possibility that the relevant authorities will indicate that no such licence is required (although this is less likely with the US). There is uncertainty as to when such licences (or confirmation that licences are not required) will be provided, which is why the moratorium is necessary to provide the Company with breathing room to implement the Restructuring.
The key commercial terms of the Scheme are as follows:
a. First, all Scheme Creditors will be entitled to receive a pro rata allocation of two series of newly issued notes governed by English law, comprising:
i. US$250 million of new senior secured notes, which will bear 5% interest (to be paid in cash) and will mature on 30 June 2026. These new senior secured notes will benefit from first-ranking security over all the Group's assets and will be guaranteed by the Guarantors; and
ii. US$300 million of new senior unsecured notes, which will bear 1% interest (to be paid in cash), plus 13% (to be paid in kind by being capitalised and added to the principal) and will mature on 30 June 2026. These new senior unsecured notes will benefit from second-ranking security interests over certain bank accounts of the Group, but will otherwise be unsecured. They will, however, benefit from guarantees provided by the Guarantors, and will be capable of being repaid through the issuance of new shares in the Company.
b. Second, all Scheme Creditors will be entitled to receive a pro rata allocation of new shares in the Company representing 88.89% of the equity on a fully-diluted basis.
c. Third, the holders of the new senior unsecured notes will be entitled to receive the benefit of a pro rata allocation of additional share warrants (“the New Warrants”) issued by the Company to a trustee on their behalf. Upon the exercise of the New Warrants, the holders of the new senior unsecured notes would increase their holding of the enlarged issued share capital of the Company to 90%.
Under the Scheme, the Scheme Creditors are expected to recover between 29.4% to 40.0% of the amounts presently due under the Existing Notes. An analysis carried out by Grant Thornton on the likely returns to the Scheme Creditors in formal insolvency proceedings (“the Scheme Comparator Report”) identifies two possible scenarios:
a. The first scenario, a planned insolvency, is where the insolvency proceedings are proceeded by a reasonable period of time to allow for contingency planning and an orderly entry into insolvency proceedings. The Scheme Comparator Report shows that the likely recoveries for the Scheme Creditors in a planned insolvency would be equal to 16% of the sums outstanding under the Existing Notes.
b. The second scenario, an unplanned insolvency, would involve a disorderly collapse of the business and a piecemeal liquidation. In this scenario the likely recoveries would be approximately 10.6%.
I am satisfied that this is an appropriate and credible comparison: insolvency in the absence of the Scheme must be a strong possibility given the history related above and in particular non-payment under the Existing Notes and the forbearance arrangements. Whether the evidence is convincing that, whether planned or unplanned,...
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