Creditor-led Part 26A plan with cross-class cram-down

NGI Systems & Solutions Ltd v The Good Box Co Labs Ltd [2023] EWHC 274 (Ch)When will a court approve a Part 26A plan proposed by a creditor in opposition to a proposed sale by joint administrators?

Overview

This case considers the circumstances in which a court will approve a rival Part 26A restructuring plan proposed by a creditor in opposition to an application by joint administrators to sell the company’s business and assets. It also outlines when a court will approve a cross-class cram-down under Part 26A.

Background

The Good Box Co Labs Limited (the “Company”) was incorporated in July 2016, carrying on business as a provider of bespoke payment terminals for the benefit of charities and fundraisers. NGI Systems & Solutions Limited (“NGI”) is a shareholder, supplier and creditor of the Company.

By summer 2022, the Company had been experiencing financial difficulties for several years. NGI considered that a restructuring plan would be the best outcome for the Company, whereas the Company’s directors appeared more attracted by a pre-pack sale. On 28 June 2022, the Company was placed into administration on the application of NGI, with Jeremy Frost and Stephen Wadsted of of the Frost group appointed as joint administrators (the “Administrators“). NGI agreed to provide certain secured funding during the administration to enable the Company to continue trading.

In December 2022, NGI brought an application to formally oppose a sale of the Company’s business and assets on the basis that it was working on a restructuring plan proposal which would result in the rescue of a company as a going concern. The Court granted NGI standing to propose a meeting of the Company’s creditors for the purposes of considering and voting on the proposed Part 26A restructuring plan.

The salient terms of the plan included:

1. Additional funding to be provided by a consortium of “rescue funders”, including NGI, who will be allocated 85% of the new equity in the Company;

2. The Company’s convertible noteholders to have their debt exchanged for 14% of the new equity in the Company;

3. Trade creditors to be paid in full using the new funding; and

4. Existing shareholders to be diluted to receive 1% of the new equity in the Company.

The meeting was held and the plan was approved by a majority of existing shareholders, trade creditors and administration creditors, including NGI. However, the Company’s convertible noteholders voted unanimously against the plan.

NGI then applied for court sanction of its plan. The Administrators’ application for directions that they should sell the Company’s business and assets, having been adjourned previously, was also before the Court at the hearing on 16 January 2022. At this time, the anticipated sale was at a price of £375,000, not including the sale of software and related intellectual property, for which no buyer was lined up. Any further realisations seemed extremely speculative and unlikely.

The Court’s Decision

The Court ultimately sanctioned NGI’s restructuring plan and dismissed the Administrators’ application for a direction to effect the sale that they had identified, notwithstanding that the Company’s convertible noteholders voted against the plan. The Court adopted the following considerations in determining whether a cross-class cram-down should be approved:

1. Have the jurisdictional requirements of section 901A been met;

2. Compliance with the statutory conditions under section 901D and the terms of the convening order;

3. The constitution of the scheme meetings;

4. Were the statutory majorities obtained;

5. Were the meetings fairly representative of the class;

6. Can the court safely rely on the outcome of the meetings, taking into account the explanatory statement, the arrangements for holding and ascertaining the wishes of attendees, and whether any oppressive conduct occurred, or whether stakeholders exercised their votes in bad faith otherwise than by reference to their interests as class members;

7. Is the restructuring plan one that might reasonably be entered into by an intelligent and honest class member addressing the issues for decision from the standpoint of his or her ordinary class interests;

8. Are the two threshold conditions for a cross-class cram-down satisfied; and

9. Should the court exercise its discretion to sanction the restructuring plan and override the views of the dissenting class?

(1) Jurisdiction

The Court considered that the formal requirements under section 901A were met – the Company was incorporated in England and Wales, the Company had encountered financial difficulties affecting its ability to continue as a going concern, and the proposed restructuring plan amounted to a compromise or arrangement between the company and its creditors / members.

In addition to the formal requirements under section 901A, the Court found that there was inherently a fourth condition which applies under section 901A – that the company itself (by its directors or shareholders or, where the company is in an insolvent regime, by the relevant officeholder) must consent to the relevant scheme of arrangement and/or compromise. It directed the Administrators to provide the consent of the Company to the scheme, concluding that the concerns raised by the Administrators (discussed below) were not sufficient to prevent the Court from sanctioning the restructuring plan.

The only potential exception was that, on a sale by the Administrators, employees would transfer under TUPE, whereas under the restructuring plan, some employees would lose their jobs. However, the Court concluded that, on the sale, the protection was only for the immediate future – there was no certainty that jobs would be protected once the sale had taken place.

In addition, this was not a case where the Administrators actively opposed the order being sought. Rather, they sought to remain neutral whilst drawing relevant matters to the Court’s attention. As a result, the Court directed the Administrators to provide the Company’s consent, satisfying the last jurisdictional consideration.

(2)-(7) Class Meetings

With respect to the class meetings, the Court concluded that the classes were correctly composed and the meetings were properly convened, all of the creditors having been duly notified. The Administrators raised a question as to whether the explanatory statement adequately explained the issue of FCA authorisation, but the Court found that statement set out clearly that both the board and the shareholders will require FCA approval, the risk that such approval may not be forthcoming and the relevant consequences, as well as other general risks relating to future trading.

With respect to the issue of whether class members had sufficient information to weigh the proposed plan against a potential sale, the Court noted that any value that could be attributed to the company’s intellectual property was entirely speculative, and that the classes would have been aware that there was an issue about intellectual property. In addition, the possibility of potential claims by the Company against NGI and another creditor was made clear in the explanatory statement, as was the point that on the face of it there was no funding in place for the investigation, assessment and, if appropriate, prosecution of such claims. The Court concluded that an intelligent and honest class member had to weigh up the risks (including the risks flowing from any lack of information) and come to a view. On balance, the Court could not say that such a class member, of each of the classes, would not be acting reasonably in voting for the restructuring plan.

(8)-(9) Threshold Conditions for Cross-Class Cram-Down and Discretion to Override Wishes of Dissenting Class

Under section 901G the court is not prevented from sanctioning a plan by reason of the fact that a particular class did not vote in favour of the plan if two conditions are met.

First, the court must be satisfied that, if the plan were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative. In this case, the relevant alternative would be a sale of the business and assets (minus intellectual property) for £375,000 and the administration would then rapidly come to an end and the company move into liquidation. In that situation, NGI would obtain repayment of some of its secured lending in the administration and the convertible noteholders would get nothing, whereas under the restructuring plan, the convertible noteholders will obtain an equity stake in the Company. As a result, the Court concluded that the convertible noteholders will be no worse off if the restructuring plan is sanctioned.

The second condition is that the plan has been agreed by a number representing 75% in value of a class of creditors present and voting at the relevant meeting summoned under section 901C, who would receive payment, or have a genuine economic interest in the company in the event of the relevant alternative. That condition was met, as the administration creditors were such a class.

Finally, the Court considered whether the restructuring plan was fair as between the different classes and concluded that it was appropriate to override the wishes of the convertible noteholders. As regards the payment of trade creditors in full, as compared with the position of the convertible noteholders, this was justified on the practical grounds that the goodwill of trade creditors is essential to the continued trading of the Company and the debts as a whole are significantly smaller. Further, and significantly, although NGI will receive its trade debt back and part of that trade debt will not be subject to challenge, it is providing significant funding for the Company going ahead, is turning its secured debt arising as an administration debt into equity and is agreeing to revised terms of business with the Company.

Accordingly, the Court sanctioned NGI’s restructuring plan, directed the Administrators to provide the Company’s consent to the plan and dismissed the Administrators’ application for a direction to effect the sale that they had identified.

Judge: HH Judge Davis-White KC (Sitting as a Judge of the Chancery Division)

Counsel: Mr Matthew Maddison of Enterprise Chambers (instructed by Walker Morris LLP) for NGI; Mr Neil Berragan of Kings Chambers (instructed by Carrick Read Leeds) for the Joint Administrators