Sunbird Business Services Ltd

JurisdictionEngland & Wales
JudgeMr Justice Snowden
Judgment Date28 October 2020
Neutral Citation[2020] EWHC 2860 (Ch)
CourtChancery Division
Docket NumberCase No: CR-2020-003942
Date28 October 2020

[2020] EWHC 2860 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES

INSOLVENCY AND COMPANIES LIST (ChD)

Rolls Building,

Fetter Lane,

London, EC4A 1NL

Before:

Mr Justice Snowden

Case No: CR-2020-003942

Between:
In the Matter of Sunbird Business Services Limited
In the Matter of Part 26 of the Companies Act 2006

Andrew Thornton QC (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for the Company

Henry Phillips and Lauren Kreamer (instructed by Shoosmiths LLP) for the Opposing Creditors

Hearing date: 19 October 2020

Approved Judgment

Mr Justice Snowden Mr Justice Snowden

Introduction

1

This is a renewed application by Sunbird Business Services Limited (the “Company”) seeking an order convening a single meeting of its financial (non-trade) creditors (the “Scheme Creditors”) for the purposes of considering and, if thought fit, approving, a proposed scheme of arrangement (the “New Scheme”) between the Company and the Scheme Creditors pursuant to Part 26 of the Companies Act 2006. The Company also seeks directions as to how the court meeting should be convened.

2

I refer to this matter as “the New Scheme” because on 18 September 2020 I dismissed the Company's application for sanction of a scheme in near identical terms (the “Original Scheme”). My reasons for doing so were set out in a written judgment: [2020] EWHC 2493 (Ch) (the “Judgment”). Unless otherwise indicated, I shall use the same abbreviations herein as in the Judgment.

3

As was the case with the Original Scheme, the New Scheme provides for a debt to equity conversion of the debts of the Scheme Creditors (amounting to about US$15.9 million plus accrued interest) into A1 Ordinary Shares in the Company at a conversion rate of one A1 Ordinary Share for each US$0.33 of debt (the “Debt to Equity Conversion”).

4

The Debt to Equity Conversion under the Scheme would not provide the necessary working capital for the continued operations of the Company's group of subsidiaries. Accordingly, as was the case with the Original Scheme, conditional upon the New Scheme becoming effective, the Company proposes to raise working capital for the group by a fully underwritten rights issue of further A1 Ordinary Shares in the Company (the “Rights Issue”). The Rights Issue will apply to all of the Company's existing shareholders, including the Scheme Creditors in respect of their converted debt, and will raise a further US$3 million at a subscription price of US$0.20 for each new A1 Ordinary Share.

5

In the Judgment I held that the information provided by the Company to the Scheme Creditors in relation to the Original Scheme was inaccurate, incomplete and, in certain respects, misleading. I also criticised the manner in which the Company had approached the scheme process. It had not, for example, provided Scheme Creditors with a letter complying with the Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345; and had engaged individually and informally to enter into “lock-up” agreements with those creditors who it thought would be supportive of its proposals, whilst seeking to keep creditors who were opposed to the Original Scheme at arm's length and in the dark about the convening hearing.

6

In putting forward a renewed application in respect of the New Scheme, the Company contends that it has sought to rectify the defects that I identified in the Judgment. So, for example, I have been told that it has released Scheme Creditors who had previously entered into lock-up agreements in relation to the Original Scheme from any obligations in that regard, and it sent a letter to the Scheme Creditors in accordance with the new Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) (the “Practice Statement”) by email on 5 October 2020.

7

Further, the draft scheme document and explanatory statement (the “Scheme Document”) which was produced by the Company shortly prior to the convening hearing on 19 October 2020, has been significantly revised. It now includes, in particular, an analysis of the estimated returns to Scheme Creditors if there were to be a formal insolvency of the Company and each of its subsidiary companies (the “Insolvency Analysis”), and detail in relation to the Rights Issue. The Scheme Document also includes a report which purports to relate to the underlying methodology and justification for the decision of the board of the Company in setting the conversion ratio for the Debt to Equity Conversion and the pricing of the Rights Issue (the “Valuation Report”).

8

According to the Scheme Document, the Insolvency Analysis and Valuation Report have been provided for the information and benefit of the board by two insolvency practitioners and the corporate finance arm of James Cowper Kreston LLP (“JCK”). It is, however, stated that the Insolvency Analysis has been prepared primarily on the basis of information provided by the management of the Company, and that JCK has not sought to verify the reliability of that information (except by reference to certain information at Companies House). JCK also states that it assumes no responsibility to any other party for either document.

The Issues

9

The Original Scheme was opposed by a group of creditors to which I referred in the Judgment as the “Opposing Creditors”. The same creditors appeared by counsel at this convening hearing. At this stage they have not indicated their position on the merits of the New Scheme, but for ease of reference I shall continue to refer to them as the Opposing Creditors.

10

The Opposing Creditors have raised three points concerning the convening order sought by the Company.

11

First, they raise a question of class composition for the purposes of voting at the court meeting(s). They contend that one of the other Scheme Creditors, 21 st Century Group Holdings Limited (“21 st Century”) should not be included in the same class as all other Scheme Creditors but should constitute a separate class on its own. That contention arises from the fact that in addition to being a Scheme Creditor owed about US$1.75 million plus interest by the Company (about 11% of the total New Scheme debt), 21 st Century is owed a debt of US$890,000 (US$750,000 principal plus interest of US$140,000) by the Company's wholly owned subsidiary, Sunbird Business Services Africa Limited (“SBSAL”). SBSAL is a holding company which sits in the group structure immediately below the Company and owns the shares in all of the group's operating subsidiaries, together with some inter-company debts.

12

The Company has entered into a separate consensual agreement with 21 st Century (the “Deed of Novation”) under which, conditional upon the New Scheme being sanctioned, the debt owed by SBSAL to 21 st Century will be novated and assumed by the Company and converted into new A1 Ordinary Shares in the Company at the same conversion rate as offered to Scheme Creditors under the New Scheme. 21 st Century will then also be entitled to participate in the Rights Issue in respect of those new shares pari passu with all other shareholders in the Company (including the Scheme Creditors).

13

The Opposing Creditors contend that the effect of the Deed of Novation is that, pursuant to the wider restructuring, 21 st Century is going to be given valuable additional rights by the Company that are not being given to other Scheme Creditors. They have calculated that under the New Scheme, 21 st Century will receive 708,929 A1 Ordinary Shares (if accrued interest to 19 October 2020 is included) in return for a discharge of its Scheme Claim. This is in line with the deal offered to other Scheme Creditors. In addition, the Opposing Creditors contend that 21 st Century will have a near-worthless loan against a different entity treated as a liability of the Company and will thereby qualify to receive a further 298,051 A1 Ordinary Shares (if accrued interest to 12 June 2020 is included), which will themselves carry a further right to subscribe under the Rights Issue for a pro-rated entitlement to A1 and A2 Ordinary Shares in the Company.

14

Although this arrangement brought about by the Deed of Novation is outside the New Scheme and therefore does not serve to increase the votes which 21 st Century will be entitled to cast at the court meeting to consider the New Scheme, the Opposing Creditors contend that these are valuable additional rights offered to 21 st Century under the broader restructuring of which the New Scheme forms the central part, they are collateral to and conditional upon the New Scheme being sanctioned, and they are not available to other Scheme Creditors. The Opposing Creditors contend that the conferring of such rights means that 21 st Century is in effect being offered a materially different and more advantageous deal than the other Scheme Creditors and hence should not be permitted to form part of the same class when voting on the New Scheme.

15

Secondly, the Opposing Creditors raise a number of concerns about the form and content of the Scheme Document. In particular, they contend that because the Insolvency Analysis has been provided by JCK on the basis that JCK assumes no responsibility to any party other than the board of the Company, it cannot properly form the basis for any class...

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