Telewest Communications Plc , Re [2004] EWHC 924 (Ch)

[2004] EWHC 924 (Ch)Case No 2518 of 2004
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 26/04/2004
Before
THE HONOURABLE MR JUSTICE DAVID RICHARDS
Between
In the Matter of Telewest Communications PlcIn the Matter of Companies Act 1985
Robin Dicker QC and Richard Snowden QC (instructed by Freshfields Bruckhaus Deringer) for Telewest Communications plc and Telewest Finance (Jersey) LtdRichard Sheldon QC (instructed by Fried, Frank, Harris, Shriver & Jacobson LLP) for Bondholder CommitteeMartin Moore QC and Sir Thomas Stockdale (instructed by Sherman & Sterling (London) LLP) for Opposing BondholdersHearing Hearing dates: 22 and 23 April 2004
JudgmentMr Justice David Richards :
[1]These are two applications under section 425(1) of the Companies Act 1985 for leave to convene meetings of creditors for the purposes of considering schemes of arrangement. The companies making the applications are Telewest Communications PLC (Telewest) and its wholly owned subsidiary, Telewest Finance (Jersey) Ltd (Telewest Jersey). The relevant creditors are principally bondholders. In the case of Telewest, they are the holders of eleven series of unsecured bonds, six of which are denominated in US dollars with a total nominal value of $3.987 billion and four of which are denominated in sterling with a total nominal value of £1.099 billion. In the case of Telewest Jersey, the relevant creditors are the holders of a single series of unsecured bonds with a total nominal value of $500 million. The proceeds of the Telewest Jersey bonds were lent to Telewest and the bonds themselves were guaranteed by Telewest. The creditors of Telewest for the purpose of its proposed scheme of arrangement include, in addition to its bond holders, Telewest Jersey in respect of its loan to Telewest and the holders of the Telewest Jersey bonds in respect of the guarantee. The claims covered by the proposed schemes include not only the principal and interest outstanding under the bonds but also any ancillary claims in connection with the bonds, such as mis-selling claims. As yet no such ancillary claims have been notified to either of the companies.[2]Telewest is an English company, but Telewest Jersey is incorporated in Jersey. Telewest Jersey is nonetheless a company for the purposes of section 425: re Drax Holdings Ltd [2004] 1BCLC 10. I am satisfied that, subject to the matters to be considered in this judgment, it is appropriate to exercise the jurisdiction under section 425 in respect of Telewest Jersey, on the grounds that the two schemes are inter-related and Telewest Jersey’s principal asset is the debt due to it from Telewest which is an asset located in England. It is proposed that the Telewest Jersey scheme should also be sanctioned under the equivalent procedure in Jersey.[3]Telewest is the holding company of a large group of companies engaged principally in telecommunications. Its shares are listed in London and, as represented by American Depository Receipts, on Nasdaq in New York. Since its flotation in 1994, the group has incurred substantial borrowings to fund the capital costs of its network construction and the acquisition and operation of its UK cable business. The main intermediate holding company of the operating companies in the group is Telewest Communications Network Ltd and at 31 March 2004 it owed some £8.2 billion to Telewest. The group’s external borrowings consist principally of the bonds and bank debt comprising a senior secured credit facility guaranteed by Telewest under which about £2 billion has been drawn down. In addition Telewest owes about £33.3 million plus interest to various swap counterparties and about £17 million under various finance leases.[4]Since 1994 the group has incurred substantial operating losses, leading in March and April 2002 to a downgrading of its credit-rating which in turn led to severe limitations on its ability to service its debts. The group began negotiations with its senior lenders and bondholders and an informal committee of bondholders was established in June 2002 (the Bondholder Committee).[5]On 1 October 2002 Telewest defaulted on a swap with Credit Agricole Indosuez (CAI) which resulted in default under the banking facility and under all of the bonds. CAI presented a winding-up petition against Telewest on 29 October 2002. The petition has been adjourned from time to time to allow for the promotion of the schemes and will be dismissed by consent if the schemes are sanctioned and the proposed financial restructuring is successfully completed. In consultation with the bondholder committee, Telewest and Telewest Jersey have not paid interest on the bonds since October 2002.[6]Negotiations with the Bondholder Committee and others have been protracted and difficult and an earlier non-binding agreement had to be revised following the issue of proceedings in New York by a fund manager interested in a substantial amount of the bonds. A non-binding agreement of the main terms for compromise with bondholders was approved and signed in September 2003 by parties then holding over 66% of the principal amount of the bonds and 41% of Telewest’s shares. The principal feature of the agreement is a debt for equity swap involving the cancellation of the bonds in exchange for 98.5% of the shares in a new holding company, Telewest Global Inc, with the balance of 1.5% to be held by the shareholders of Telewest. The detailed terms of the proposal were further developed by the bondholder committee, Telewest and others and were announced on 12 December 2003. They form part of a comprehensive restructuring which involves also the transfer of substantially all of Telewest’s assets to Telewest UK, a subsidiary of Telewest Global, in consideration for the assumption of substantially all of Telewest’s remaining liabilities and new arrangements with the senior lenders.[7]Telewest is at present heavily insolvent and these proposals, in particular the proposed scheme of arrangement, are put forward as an alternative to a liquidation or administration. The directors of Telewest and all those represented before the Court on these applications are agreed that the scheme represents a substantially better alternative.[8]It is unnecessary at this stage to go into the detail of the proposed schemes of arrangement. In outline, they provide for an immediate cancellation of the scheme claims in respect of the bonds, the Jersey inter-company debt and the Telewest guarantee of the Jersey bonds. In consideration each scheme creditor will become entitled to receive new shares denominated in dollars in Telewest Global Inc, pro rata to their total claims. The total number of new shares is fixed and will be issued to an escrow agent for distribution among the bondholders and other scheme creditors. There is provision requiring all ancillary claims under the scheme to be submitted by a bar date, which will be one day after the effective date, and for an expeditious adjudication process in respect of any ancillary claims which are submitted.[9]In order to determine the number of new shares to be transferred to each scheme claimant, it is necessary to express all claims covered by the scheme in a single currency. For this purpose, the scheme will provide for sterling claims to be converted into US dollars in accordance with a formula defined in the scheme as the Scheme Rate and described in argument as the Average Exchange Rate. This rate is the average of the closing mid-point spot rates for the conversion of sterling into US dollars, as reported by Bloomberg LP for each trading day in the period commencing 1 October 2002 and ending on the last practicable date before posting the explanatory statement for the scheme. The commencement date of 1 October 2002 was chosen because it was the date on which an event of default first occurred in respect of the bonds and the closing date has been chosen to enable the precise exchange rate to be stated in the explanatory statement. Evidence filed on behalf of the companies and the Bondholder Committee shows that this exchange rate was chosen by the committee in consultation with its financial and legal advisors. A number of alternatives were considered but this was regarded as the most appropriate on the grounds that it enabled the rate to be known at the date when the explanatory statement was sent to bondholders and that use of a spot rate on a single date would make bondholders’ entitlements under the scheme susceptible to short term exchange rate fluctuations. The evidence before the court demonstrates how volatile those fluctuations can be. It was considered that the Average Exchange Rate would produce a fairer result for all bondholders.[10]It is this conversion rate which has been the subject of controversy on these applications. Although by no means a straight line, the trend over the period since October 2002 has been a decline in the market value of the US dollar against sterling. This was particularly marked in the period from the autumn of 2003 to February 2004 although there has been some strengthening of the dollar since then. If a spot rate today were taken as the conversion rate under the scheme, the sterling bonds and claims would convert at a more favourable rate to them than under the Average Exchange Rate. This has been the case since before 12 December 2003 when the detailed terms of the proposed scheme were announced. Almost immediately some holders of sterling bonds took issue with this aspect of the proposal and an informal committee of sterling bondholders has been established, representing the holders of some 15 per cent of the sterling bonds. It is stated in their evidence on this application that they have support of the holders of a further 3 per cent of the sterling bonds.[11]The companies proposing the schemes and their advisors rightly took the view that this was an appropriate case in which to use the full procedure set out in the Practice Statement [2002] 1 WLR 1345. That procedure, put in place following the decision of the Court of Appeal in re Hawk Insurance Co Ltd [2001] 2 BCLC 480 and taking account in particular of the observations of Chadwick LJ in that case, is designed to enable so far as possible the determination of all issues in relation to the composition of the class or classes of creditors or members for the purposes of a scheme to take place at the hearing of the application for leave to convene meetings. These issues go to the court’s jurisdiction to sanction a scheme, rather than the exercise of its discretion to grant or withhold its sanction. The hearing of these applications was advertised in a number of appropriate newspapers and creditors were invited to make representations to the court if they objected to the class or classes proposed by the companies. The bondholders represented by the informal committee of sterling bondholders ("the Opposing Bondholders") have appeared on these applications by counsel.[12]Like the members of the Bondholders Committee, those sterling bondholders represented on the Sterling Bondholders Committee include substantial fund management groups. They would not take the step of opposing this application by Telewest unless they had real concerns in relation to their position, all the more so as they are supportive of the attempts to agree a financial restructuring. As their principal deponent Steven Harrison, a fund manager with Threadneedle Asset Management Limited, puts it in his witness statement:
"I therefore believe that all rational creditors of Telewest will do their utmost to ensure that an agreement is reached to restructure the company. I do not believe and have never believed that a winding up is an attractive scenario, and I am sure that holders of Notes would be better served by a restructuring. "
[13]Their concern is that adoption of the Average Exchange Rate, as against a spot rate on the date on which scheme claims are valued, produces seriously unfavourable treatment of the sterling bondholders as against the dollar bondholders. This is on the basis of the spot rates since before the detailed announcement in December 2003 and assumptions made as to the likely spot rate on the valuation date which is likely to be a few days from now, if no change is made to the scheme and if leave to convene the meetings is granted. As explained by Mr Harrison in his witness statement, it is the Opposing Bondholders’ main contention that the scheme should not be permitted to proceed in its present form. The court should not give leave to convene meetings unless Telewest is willing to amend the terms of the scheme to substitute conversion at a spot rate on the valuation date for the Average Exchange Rate. In the alternative, if the court permits the scheme to proceed in its present form, they submit that there should be separate meetings of the sterling and dollar bondholders. However, they do not regard it as an appropriate alternative, as it faces sterling bondholders with an unacceptable choice between unequal treatment under the scheme or an insolvent winding-up. As I understand the position of the Opposing Bondholders, if the scheme does proceed in its present form, whether with one meeting or with two meetings, they would vote in favour of the scheme, because the alternative of a winding-up is so much worse. Hence their concern is to ensure that the scheme does not contain the Average Exchange Rate. In presenting their case to the court, Mr Moore Q.C made submissions first on the question of classes, but the Opposing Bondholders’ objection to the inclusion of the Average Exchange Rate remains commercially and logically their primary point.[14]In considering the primary position of the Opposing Bondholders, it is important to keep in mind the function of the court at this stage. This is an application by the companies for leave to convene meetings to consider the schemes. It is emphatically not a hearing to consider the merits and fairness of the schemes. Those aspects are among the principal matters for decision at the later hearing to sanction the schemes, if they are approved by the statutory majorities of creditors. The matters for consideration at this stage concern the jurisdiction of the court to sanction the scheme if it proceeds. There is no point in the court convening meetings to consider the scheme if it can be seen now that it will lack the jurisdiction to sanction it later. This is principally a matter of the composition of classes. Under section 425, the court will have no jurisdiction to sanction the scheme if the classes have been incorrectly constituted. It is perhaps unfortunate that this is the case and there is much to commend an approach which enables the court to sanction a scheme in an appropriate case, where the classes have been incorrectly constituted in a way which would not have affected the outcome of the meetings. But that is not the position under section 425 and the practice now is to deal so far as possible with issues of class composition at the first stage of the application for leave to convene meetings. There might exceptionally be other issues which would go to jurisdiction and could be properly raised at this stage: see re Savoy Hotel Ltd [1981] Ch 351. What the court should not do is to consider the fairness of the scheme with a view to deciding whether at the later hearing it will or will not sanction it.[15]If the Opposing Bondholders’ position is that the inclusion of the Average Exchange Rate produces so unfair a result that no court would sanction the scheme, that as it seems to me can and should be considered at the hearing to sanction the scheme. It may however be their position that the scheme is so unfair that it should not be put to creditors, but it could nevertheless properly be sanctioned if it were put to creditors and approved by them. If so, it appears to me to be logically untenable but in any case it would again require the court to investigate the merits at a premature stage.[16]Accordingly, I will not refuse the companies’ applications on the grounds that a different conversion rate should be included in the Telewest scheme.[17]It is therefore necessary to consider the Opposing Bondholders’ alternative submission that if the scheme is to proceed in its present form, the sterling bondholders of Telewest form a separate class of creditors from its dollar bondholders and there must therefore be separate meetings of each class for the purposes of considering the Telewest scheme.[18]It is odd to embark on consideration of this issue if, as I understand the position, the Opposing Bondholders were likely to vote in favour of the scheme whether there were one or two classes. So far as their position is concerned, it would therefore seem to be an issue of no importance. Usually, creditors or members opposing a scheme will argue for separate classes because they wish to vote against the scheme but without a separate class they will be outvoted by those with different rights. This is the underlying purpose of separate meetings as explained by Bowen LJ in Sovereign Life Assurance v. Dodd [1892] 2 QB 573 at 582-583 in relation to the equivalent provisions of the Joint Stock Companies Arrangement Act 1870:
"What is the proper construction of that statute? It makes the majority of the creditors or of a class of creditors bind the minority: it exercises a most formidable compulsion upon dissentient, or would-be dissentient, creditors; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to do that which it is unreasonable to require them to do, or of making a mere jest of the interests of the minority. "
However, the class issue has been raised and, as it goes to jurisdiction, the court must deal with it. Although the holders of a significant majority of the sterling bonds are represented at this hearing, there remain the holders of approximately 25 per cent of the sterling bonds who are not represented and are in fact largely unknown to Telewest or to either of the informal committees of bondholders. It is also the case that the Opposing Bondholders have said and done nothing which would prevent them from voting against the Telewest scheme.[19]The approach to be adopted to the composition of classes for the purposes of section 425 has been the subject of a number of recent cases. Two issues in particular have been considered. First, the distinction between rights and interests has been underlined and it has been clearly reaffirmed that it is differences in rights, not interests, which are relevant to the composition of classes. Secondly, the authorities have given important guidance as to the identification of relevant rights and the extent to which differences in rights requires different classes. The leading English authority on this issue is the decision of the Court of Appeal in re Hawk Insurance Co Ltd, on which both Mr Dicker Q.C for the companies and Mr Moore Q.C for the Opposing Bondholders have placed great reliance. Both counsel also drew attention to the decision of the Final Court of Appeal of Hong Kong in re UDL Holding Ltd [2002] 1 HKC 172. The reasoned judgment in that case was given by Lord Millett sitting as a non-permanent judge of the court. He analysed the relevant authorities in a number of jurisdictions, including in particular those dealing with the two issues which I have mentioned. At pages 184-185 he sets out a number of principles to be derived from the authorities, including the following:
"(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. (3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings. (4) The question is whether the rights which are to be released or varied under the scheme or the new rights which the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class. "
[20]The test based on the similarity or dissimilarity of rights goes back to the judgment of Bowen LJ in Sovereign Life Assurance Co v. Dodd. He said at page 583, a little later in the passage which I have already cited:
"The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. "
The significance of this passage is two-fold. First, it makes clear that it is rights, not interests, which are the governing factor in the composition of classes. Secondly, and it is this aspect which is central to the present case, it is the extent to which the relevant rights are dissimilar which will determine the composition of classes in any particular case.[21]This is emphasised by Chadwick LJ in re Hawk Insurance Co Ltd at para. 33:
"When applying Bowen LJ’s test to the question "are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as single arrangement; or ought it to be regarded, on a true analysis, as a number of linked arrangements?" it is necessary to ensure not only that those whose rights really are so dissimilar that they cannot consult together with a view to a common interest should be treated as parties to distinct arrangements – so that they should have their own separate meetings – but also that those whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do so; lest by ordering separate meetings the court gives a veto to a minority group. The safeguard against majority oppression, as I sought to point out in the BTR case ([2001] 1 BCLC 740 at 747) is that the court is not bound by the decision of the meeting. It is important Bowen LJ’s test should not be applied in such a way that it becomes an instrument of oppression by a minority. "
[22]The rights need not be identical, but they must not be so dissimilar as to make it impossible for the members of the class to consult together with a view to their common interest. This is a question of judgment on the circumstances of each case, although I would add that in most cases it is unlikely to be difficult. In re Hawk Insurance Co Ltd, Pill LJ said in paragraph 61-62:
"In my view, scrutiny of the facts is essential to the decision on jurisdiction. Having said that, I agree that given the statutory procedure, the protection given to creditors by the discretion available to the court and the practical considerations already mentioned, a broad view should be taken of the meaning of "class" in s 425(1), as that word is defined by Bowen LJ. "
See also re Anglo American Insurance Ltd [2001] BCLC 755 at 765, per Neuberger J.[23]It is Telewest’s case that, applying the test and general approach developed by the courts for determining the composition of classes, the sterling and dollar bondholders form a single class. Although the various series of bonds had different maturity dates, they are all in default and have been repayable since October 2002. They are all unsecured and would rank pari passu in a liquidation of Telewest. Under the terms of the proposed scheme, all the bonds will be cancelled and their claims discharged and in each case they will receive by way of consideration an entitlement to shares in the new holding company. Because the bonds are denominated in two currencies, it is necessary to use a common currency as a basis for the distribution of the new shares. Although the scheme proposes a conversion for this purpose of sterling bonds into dollars, any rate of exchange proposed will also affect the dollar bondholders because it is one of the factors which determines the proportions of the total number of shares to be distributed to the sterling and dollar bondholders respectively. As Mr Dicker for Telewest put it, the scheme involves no alteration of rights, unless the bondholders can be said to have an embedded right to a particular exchange rate which differs from that adopted in the scheme.[24]The issues which arise are therefore: i. do bondholders have a right to a particular exchange rate formula, and ii. if so, does the choice of formula in the proposed scheme create overall a sufficient disparity of result for the sterling bondholders that they should be constituted as a separate class.[25]The Opposing Bondholders submit that they have a right to require conversion of sterling claims into dollars under the scheme to be at a spot rate on a particular day, namely the day as at which claims are valued for the purposes of the scheme. Under the proposed scheme, the valuation of claims is to be as at the Record Date which is also the date for ascertaining scheme claims. The Record Date will be a fixed date, defined in the scheme. In the draft of the scheme before the Court it is 30 April 2004 which is also the proposed date for posting documents to scheme creditors, but it may be that there will be some slippage in both dates.[26]There has been some change in the date put forward on behalf of the Opposing Bondholders. In earlier correspondence, it was suggested that the date for conversion should be on or around the effective date of the scheme but, as Mr Moore explained, it was not then known that the valuation date would not be on or around the effective date which is often the case. In their evidence and in their written and oral submissions, the Opposing Bondholders have consistently said that conversion should be on the valuation date.[27]The Opposing Bondholders’ case is summarised in this way in their written submissions: "(a) Where a scheme of arrangement is put forward as an alternative to insolvency, the rights to be compared, in order to see whether the scheme involves one arrangement or more than one, are the rights to which creditors are entitled under the scheme and the rights to which they would be entitled in an insolvent winding up. (b) The comparison to be made is with an insolvent winding up which would take place if the Scheme did not become effective. (c) If Telewest were to be wound up there would be one currency only in the liquidation which would be pounds sterling. (d) Claims would be converted into pounds sterling as at the date on which Telewest went into liquidation, which in the case of a winding up by the court would be the date of the winding up[28]It was not of course submitted that the provisions of a scheme involving an insolvent company cannot differ from the regime applicable in an insolvent liquidation. The purpose of most schemes of arrangement with creditors is to produce an arrangement which differs from an insolvent liquidation. If the differences apply equally to all creditors, no question of separate classes arises. So, for example, in this case, the cancellation of the bonds for equity in the new holding company is radically different from the result of a liquidation which would involve a realisation and distribution of Telewest’s assets, but it applies to all bondholders and raises no class issue. However, it is submitted that if the difference from the template of rights in a liquidation produces a result which differs in its impact on one group of creditors as against another, then subject to questions of materiality they will form separate classes for the purposes of the scheme. The choice of the Average Exchange Rate in the scheme will almost certainly produce a different result from using a spot rate on the Record Date and, it is submitted, the difference is likely to be one which benefits the dollar bondholders at the expense of the sterling bondholders. There should therefore be separate meetings of the bondholders, again subject to any question of materiality.[29]There is no dispute that, in the circumstances of a case like the present, the relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation. Strictly speaking, because the company is not in liquidation, the legal rights of the bondholders are defined by the terms attached to the bonds. However, the reality is that they will not be able to enforce those rights and that in the absence of the scheme or other arrangement their rights against the company will be those arising in an insolvent liquidation.[30]The working of this principle is illustrated by two cases. In re Richards & Co 11 Ch D 676 the court refused to sanction a scheme because it treated a creditor with preferential rights in a liquidation as an ordinary unsecured creditor. It appears that there was only one preferential creditor in that case and he objected to the scheme. If there had been a number of preferential creditors the scheme could only have been sanctioned as regards them if they unanimously consented or if there had been a separate meeting of them at which the scheme was approved by the statutory majority. The same principle underlies the decision of the Court of Appeal in re Hawk Insurance Co. Ltd. Policyholders with present, future and contingent claims were combined in one class. Outside a liquidation their rights were different, but in a liquidation they enjoyed the same right to participate pari passu in the distribution of the company’s assets, with a just estimate being made of the future and contingent liabilities. Because their rights were to be judged against their position in an insolvent liquidation and because the scheme gave effect to those rights, they were correctly included in a single class. See in particular paragraphs 34 and 40-44 of the judgment of Chadwick LJ.[31]In a liquidation, a foreign currency claim is converted into sterling for the purpose of proof at the rate prevailing on the date when the company went into liquidation. In a winding-up by the court, that is the date of the winding-up order and in a voluntary winding-up it is the date on which the resolution for winding-up is passed. That is also in each case the date for ascertaining and valuing claims against the company. The issue is whether currency conversion on that date represents a right of creditors, such that a departure from it in a scheme to the detriment of one group of creditors is capable of making that group a separate class.[32]Mr Dicker for Telewest and Mr Sheldon for the Bondholder Committee submitted that it was not such a right, but was instead simply part of the mechanics of a liquidation. The date when a company went into liquidation was a logical date to choose for currency conversion, but there was nothing fundamental about it. It was not comparable to the rights of creditors to prove on a pari passu basis or to their rights of set-off or to their rights to a statutory adjudication of their claims. Even if it were such a right, it did not follow that it should be replicated in a scheme, with conversion being at the spot rate on the date of valuation under the scheme. Given that the company proposing a scheme has a wide choice of dates for the valuation date, and creditors have no right to insist on any particular date, it is odd to say that creditors nonetheless have a right to insist on that date as the date for currency conversion.[33]Mr Moore submitted that conversion on the valuation date in a liquidation is not mechanics but is an integral part of achieving a pari passu distribution in the liquidation. Since the right to a pari passu distribution is itself a fundamental right of creditors in a liquidation, the right to currency conversion on the valuation date is likewise an important right of creditors. Creditors do not of course have a right in the sense of being able to choose whether conversion should be on that date, but similarly they have no choice in whether there is a pari passu distribution or in the application of set-off. Their right is to enforce the relevant provisions of the Insolvency Act and the Insolvency Rules.[34]In my judgment, Mr Moore is correct in his submissions on this issue. In Wight v. Eckhardt Marine GmbH [2004] 1 AC 147, Lord Hoffmann summarised the position in the following paragraphs: "23. Mr Lowe, on the other hand, relied on the principle that the claims of creditors are valued at the date of the winding-up order. As Selwyn LJ said in In re Humber Ironworks and Shipbuilding Co (1869) LR 4Ch App 643, 646-647, the assets held on the statutory trusts should be distributed as if they had all been collected and distributed on the date of the winding up[35]It was Oliver J in re Dynamics Corporation of America [1976] 1 WLR 757 who first decided, in the wake of the decision of the House of Lords in Millanges v. George Frank (Textiles) Ltd [1976] AC 443, that foreign currency claims should be converted into sterling as at the date when the company went into liquidation. He did so, not on the basis that it was a convenient date to choose, but because it was part of the process of valuing claims which, in order to give effect to the basic principle of a pari passu distribution, has to take place as at one date. His decision was approved by the Court of Appeal in re Line Bros Ltd [1983] Ch 1 which adopted the same approach as Oliver J. The reasoning is apparent from these passages in the judgment of Brightman LJ at pp 16 and 18:
"There is no particular reason, in the field of abstract justice, why the currency risk should be borne by one description of creditor rather than by another description of creditor when they are all directed to rank pari passu. They do not rank pari passu if the sterling creditors are required to underwrite the exchange rate of the pound for the benefit of the foreign currency creditors. The just course, as it seems to me, is to value the foreign debt once and for all at an appropriate date, and to keep that rate of conversion throughout the liquidation until all debts have been paid in full. I have quoted at length from authorities on a proposition which is accepted as axiomatic, in order to underline the point that the winding up date is the date of valuation of liabilities. As an account can only be struck in a single currency, it must follow that the scheme of company liquidation requires that a foreign debt shall be converted into sterling (if sterling is the currency of the liquidation) as at the date of liquidation and at no other date. "
[36]If, as these authorities demonstrate, conversion at the date of valuation of claims in a liquidation is an essential part of a pari passu distribution and is therefore an important feature which may be enforced by creditors, it follows that a scheme which provides for conversion on a different basis involves a departure from the creditors’ rights to pari passu distribution. In my view, it is not an answer to say that in a scheme it is for the company to choose a valuation date. Necessarily that is so, because there is no rule which stipulates for any particular date for a scheme but, having chosen the date on which to base the pari passu distribution, it is that date which must be used for currency conversion as well as for other valuation issues if the scheme is to provide a distribution on a truly pari passu basis.[37]The issue therefore arises as to whether the use in the Telewest Scheme of the Average Exchange Rate means that the rights of the sterling bondholders under the scheme are so dissimilar from those of the dollar bondholders that they must form separate classes. As I have already said, this is a matter of judgment on the facts of each particular case. The cases in which the point has previously arisen have concerned different rights in very different circumstances. Nonetheless, those cases do indicate that a broad approach is taken and that the differences may be material, certainly more than de minimis, without leading to separate classes.[38]In re Hawk Insurance Co Ltd, future and contingent creditors were included in the same class as present creditors even though their claims would be estimated on a basis described by Chadwick LJ as "crude or rough and ready" rather than in accordance with the fuller procedures to which they were entitled in a liquidation. The right of such creditors to a proper determination of their claims in a liquidation is an important one, which may significantly affect the value of their claims, and adoption of the rough and ready basis for assessment may produce materially adverse results for them. Nonetheless, although the Court of Appeal treated the scheme as involving different rights for the future and contingent creditors, they were not in the circumstances of that case so dissimilar as to require separate classes.[39]In re Equitable Life Assurance Society [2002] 2 BCLC 510, a separate class was constituted by policyholders in respect of their possible mis-selling claims. Apart from one distinction based in a rough and ready fashion between those whose claims would pre-date the commencement of the Financial Services Act 1986 and the remaining policyholders, all potential claims were to be treated as if they had the same strength. In fact, this was almost certainly not the position and it is likely that there was a wide disparity in the relative merits of claims. In particular it was argued that the so-called late joiners, who took out their policies shortly before the society ceased to write new business, had substantially stronger claims with the result that they should constitute a separate class. In rejecting this approach, Lloyd J pointed out that assessment of mis-selling claims on an individual basis would be incompatible with the aim of the scheme to achieve a final and speedy resolution. The ground for his decision to treat the class as one was that the late joiners were not in a fundamentally different position from all other members of the class.[40]In the present case there is a great deal more which unites the bondholders than divides them. They are all creditors of Telewest with presently payable debts of very large amounts and they will all receive shares in the new holding company in place of their bonds, which will be cancelled. The distribution of the shares will be pro rata to their claims as bondholders. The Average Exchange Rate will produce a single exchange rate for all sterling claims which will directly affect the proportions in which the new shares are distributed for all bondholders. Adopting the approach of Chadwick LJ in re Hawk Insurance Co Ltd the scheme appears to be a single arrangement with all bondholders rather than separate but linked arrangements with the sterling and the dollar bondholders.[41]The difference on which the Opposing Bondholders rely is the different financial result in using the Average Exchange Rate as against a spot rate on the valuation date. Since the valuation date is in the future, the difference cannot now been known. They accept that, at least in theory, the Average Exchange Rate could produce a more favourable result for them. These considerations strongly suggest that the right time to consider the impact of the Average Exchange Rate is at the hearing to sanction the scheme. If it can be seen that overall the scheme produces an unfair result for the sterling bondholders, it will be open to the court to refuse its sanction to the scheme. In this context, the court will be able to consider all aspects of the scheme, including the relative merits of an average exchange rate over an extended period against a spot rate on a date of Telewest’s choosing which could produce significantly different results depending on precisely which date has been chosen.[42]The effects of using spot rates on particular days was illustrated by figures put before the court. The spot rate on 19 April 2004 was $1.808 : £1. Using the Average Exchange Rate as against that spot rate would result in a reduction of 5.8 per cent in the number of new shares to be distributed to the sterling bondholders, worth $63.6 million by reference to the current market value of the bonds. However, on 22 April 2004 the spot rate was $1.7678 : £1, which would result in a reduction of 4.25 per cent, worth some $47.1 million. The current market value of all the bonds is of the order of $3.5 billion, including a market value of approximately $1.05 billion for the sterling bonds. In my judgment, these figures do not indicate in the context of the Telewest scheme such a dissimilarity in the rights of the sterling bondholders that they should form a separate class.[43]Very helpfully, Mr Moore drew my attention to a number of other schemes of arrangement with creditors and to their provisions as regards currency conversion. Mr Sheldon was able to add a further scheme to the collection. They do not demonstrate any uniform practice. In the case of six schemes, the conversion and the valuation dates were the same. In two of those six schemes (UDL Holdings Ltd and Ionica plc) it was the effective date of the scheme, in another two (Drax Holding ltd and Energis plc) it was a record date within two to four weeks before the effective date and in the remaining two (Global Crossing Inc and Hawk Insurance Co Ltd) it was a date considerably before the scheme was put to creditors. Indeed, in the case of Hawk Insurance Co Ltd it was nearly two years before the date of the meeting. In the case of three other schemes (PT Garuda Indonesia, City General Insurance Co Ltd and Marconi Corporation plc) there was a significant gap between the conversion and valuation dates, which was as much as seven months in one case.[44]Creditors whose claims were to be converted were not treated as separate classes in any of these last three cases, although there may well have been significant differences in the spot rates between the two dates. It is fair to say that it does not appear to have been a point taken by anyone or a matter drawn to the court’s attention as relevant to the question of class composition.[45]It is true, as pointed out for the Opposing Bondholders, that in none of these schemes was an average of spot rates over a period used. However, I do not see that there is any objection in principle to the use of an average rate. Evidence given on behalf of the Opposing Bondholders has drawn particular attention to the difficulties of hedging currency risks when an average rate is used and the impossibility of doing so when the relevant period started as long ago as October 2002. Objections of this sort do not in my judgment go to the issue of class composition.[46]There is clearly a suspicion on the part of the Opposing Bondholders that they have been stitched-up by the dollar bondholders in the choice of exchange rate. Evidence filed on behalf of the Bondholder Committee shows that when the Average Exchange Rate was agreed in November 2003 the six members of the Committee held approximately 41 per cent of the total value of claims in respect of the dollar bonds and approximately 41 per cent of the total value of claims in respect of the sterling bonds. Three members held a greater percentage of the claims under the sterling bonds than of the claims under the dollar bonds, and two of those three members held a significant proportion of their total bond holdings in sterling bonds (99.8 per cent and 72 per cent respectively). As at March 2004 the members of the Bondholder Committee together held a greater percentage of sterling bonds than dollar bonds and four of the six members individually hold a greater percentage of sterling bonds including two members whose sterling bond holdings represent 97 per cent and 72 per cent respectively of their total holdings. The evidence demonstrates that bondholders who hold a greater percentage of their total value of claims in respect of sterling bonds as compared with dollar bonds will benefit from any change to the exchange rate under the scheme which benefits sterling bondholders generally.[47]Mr Moore urged me to discount the views of those members of the Bondholder Committee who would benefit from a more favourable rate for sterling bondholders, because there was no information available to show what, if any, collateral interests they may have which may have influenced their views. I do not consider that I can or should disregard their views on this basis. Their position suggests that the agreement of the Bondholders Committee to the Average Exchange Rate did not reflect a sectional interest but was an attempt to arrive at a fair result. The fact that a committee comprising members with diverse holdings of dollar and sterling bonds were able to arrive at a consensus on the terms of the scheme, including the exchange rate after consideration of various alternatives, also suggests that the dissimilarity in their positions is not so great as to require separate class meetings.[48]In conclusion on this issue, I reject the submission of the Opposing Bondholders that the sterling and dollar bondholders constitute separate classes for the purpose of the Telewest scheme.[49]There are a number of further matters to which the companies drew attention in relation to the composition of classes, in accordance with their duty to the court on this application. No objection is taken by the Opposing Bondholders to the approach which the companies propose to adopt.[50]First, it is proposed that Telewest Jersey should form part of the class of scheme creditors of Telewest and should exercise its voting rights at the class meeting. As a wholly owned subsidiary of Telewest it might be objected that, as it was under the control of the proponent of the scheme, it should not form part of the general class of scheme creditors. This issue was considered in re Landmark Corp. Ltd [1968] 1 NSWR 759 by Street J, who also considered the closely related issue of the position of a creditor who owned all the shares in the company in re Jax Marine Pty Ltd [1967] 1 NSWR 145. In both cases he held that the creditors in question were properly included in the same class as other creditors, and these decisions were approved and applied by the Court of Final Appeal in re UDL Holdings Ltd. In my judgment the conclusions and reasoning in these cases are also applicable in England and there is no objection to the inclusion of Telewest Jersey in the class of creditors for the Telewest scheme. In order to deal with any argument that as matter of discretion its votes should be discounted, a procedure has been established to ensure that its votes are cast in accordance with the wishes of its own creditors.[51]Secondly, companies within the Liberty Media group own a significant number of shares as well as bonds. As shareholders they are party to a Relationship Agreement with Telewest which provides them with rights in relation to Telewest which are additional to rights enjoyed by Telewest shareholders generally, including rights of veto over certain actions and rights in certain circumstances to appoint directors. None of these will survive the restructuring, except for certain provisions relating to US gain recognition tax and its application to Liberty Media. This has no bearing on the treatment under the scheme of Liberty Media as a bondholder, which is identical to the treatment of the other bondholders. As this does not affect their rights as bondholders it provides no basis for their exclusion from the class. At most it is a question of a collateral interest and even then one of little significance.[52]Thirdly, the company expects to enter into voting agreements with members of the Bondholder Committee and certain other bondholders including Liberty Media. Under these agreements the bondholders in question would bind themselves to vote in favour of the schemes at the scheme meetings, subject to the rights of termination in the event of material adverse changes to the business plan or to the assets, liabilities, business or prospects of Telewest or its subsidiaries. For Telewest there is much sense is securing these votes in advance of the meeting and avoiding the waste of expenditure and time if bondholders who have indicated their support were simply to change their minds or sell their bonds without securing a similar undertaking from the purchaser.[53]The objection to voting agreements is that at the time of the meeting the bondholder’s votes, which could determine the outcome of the meeting, have in effect become Telewest’s votes so that the result of the meeting cannot be said to reflect the views of the class. This is not in my judgment a substantial objection, provided at any rate that the bondholder would not reasonably have voted differently in the absence of the agreement. In this case the events entitling the relevant bondholders to terminate the voting agreements ensure that if reasonable grounds exist for a change of mind they can withdraw. Even in the absence of such agreed termination events, voting agreements of this sort would not in my view create a separate class, although they would be relevant to the exercise of the discretion to sanction the scheme.[54]A serious issue would arise if in consideration of its agreement to vote in favour of the scheme, or collaterally to it, the bondholder received benefits not available to the other bondholders. In effect, the result would be unequal treatment under the scheme and the bondholder could not, I think, be included in the class. As I was informed, that is not the case with the voting agreement in this case. The voting obligations are conditional on prior payment of fees and costs incurred by the Bondholder Committee in the course of the past two years but Telewest had already, independently of the voting agreements, undertaken to pay these costs and fees. Telewest will also pay their costs of entering into the voting agreements but I consider that to be immaterial.[55]There is a useful parallel to be drawn with sections 428 ff of the Companies Act 1985. The right of a successful bidder under those sections to acquire compulsorily minority shareholdings is dependant on acceptance of the offer by the holders of 90 per cent of the shares for which the offer is made. Shares which the bidder has acquired or agreed to acquire before the offer is made cannot be counted for this purpose. Section 428(5) provides an exception where the shareholder has undertaken to accept the bid and the only consideration for the undertaking is an agreement by the bidder to make the offer. If acceptance of an offer in those circumstances can be counted in an otherwise independent majority whose acceptance will bind the minority, I see no reason why votes cast pursuant to analogous arrangements cannot be counted in determining the statutory majority at a scheme meeting. The minority retains the protection given by the need to obtain the sanction of the court to the scheme.[56]A fourth matter is the bar date for ancillary claims and the adjudication process for them under the schemes. There has been an extensive advertising programme to give notice of the bar date and its timing implications. Together with the general publicity surrounding the problems and restructuring proposals for Telewest, current and former bondholders or others interested in bonds will have had ample opportunity to submit claims. I do not consider that such differences as there may be between the provisions of the schemes and the procedure in a liquidation could found an argument that persons with ancillary claims should form a separate class.[57]Fifthly, certain creditors have not been included in the class but their claims will be paid in full, novated or compromised in some other way. This has been done for good commercial reasons and no issue arises that undermines the composition of the proposed class for each scheme: see re PT Garuda Indonesia [2001] EWCA Civ 1696.[58]A number of other points have been raised which do not in my judgment affect the composition of classes. First, the present directors of Telewest Global were nominated by certain members of the Bondholder Committee and W.R. Huff, the fund manager which initiated the litigation in New York. Once the schemes take effect, these bondholders will have no special rights in relation to the appointment or removal of directors. Secondly, a registration rights agreement will be put in place to enable those shareholders in Telewest Global who would otherwise be subject to restrictions on the sale of their share pursuant to US securities law, to be able to trade their shares. This puts them in the same position as the other shareholders. Thirdly, it is proposed that Telewest Global should implement a Rights Plan which will give the directors certain powers in the event of potential bids for the company. Such plans are commonplace in US corporations and do not involve any difference in treatment so far as concerns the bondholders. Fourthly, the terms of the Telewest scheme authorise Telewest to enter into a deed of release with various parties, including Telewest Jersey, directors and former directors, the members of the Bondholder Committee, W.R. Huff, Liberty Media and the advisors to the various parties. The release relates to any liability to any scheme creditor arising in relation to scheme claims, the indentures constituting the bonds or implementation of the scheme. Other than claims which are to be withdrawn on the effective date, Telewest and Telewest Jersey are not aware of any such claims. The scheme gives the court a discretion as to the final scope of the release. In any event a release of this sort in this type of case is understandably sought and will not usually create such a difference in the rights of the relevant bondholders as to require a separate class. Fifthly, Telewest has agreed to pay the reasonable fees and expenses of each member of the Bondholder Committee and W.R. Huff incurred in connection with the financial restructuring, including expenses related to due diligence. The directors of Telewest took the view that it was commercially necessary to agree to pay these fees and expenses if the financial restructuring was to be negotiated and pursued. They are not additional benefit arising under or collaterally to the schemes. Sixthly, some of the bondholders are involved in the preparation of a new business plan and will be paid in respect of that work. The directors believe that all material information is included in the explanatory statement but if any new material information emerges it will be made available to all creditors to ensure equal treatment.[59]I am accordingly satisfied on the evidence before the court that the class of creditors in each case is properly constituted and I will therefore give leave to Telewest and Telewest Jersey to convene the meetings proposed by them and the directions for convening and holding the meetings sought by them.[60]One final point arises. As part of the financial restructuring and in order to give full effect to the schemes, Telewest intends to apply to the US Bankruptcy Court for an order under section 304 of the US Bankruptcy Code. The need to do so arises because many of the scheme creditors are US persons, several of the indentures constituting the bonds are governed by New York law and Telewest Global is incorporated in Delaware. The application must be made by an "authorized representative" of Telewest. Unlike insolvency procedures, a scheme of arrangement does not automatically vest the powers of a company in a particular "authorized representative". The evidence demonstrates that Telewest has duly appointed Anthony Stenham or, failing him, Stephen Cook to be the "authorized representative" for the purpose of the proposed application.[61]The evidence also shows that if this court’s order confirmed their appointment as "authorized representative", this would obviate the need for further proof of their appointment in the US application. I am told that a similar course was followed in the scheme of arrangement involving Marconi Corporation plc. I am satisfied that it is an appropriate order to make. It was suggested that it could either be a direction ancillary to the convening of the meetings under section 425(1) or a declaration of due appointment made under the court’s general jurisdiction to grant declaratory relief. I consider the latter to be the right course. I have no doubt that the court can, and in the circumstances of this case should, make such a declaration. I am less certain that any such power arises by necessary implication under section 425(1), which confers on the court only power to order meetings "to be summoned in such manner as the court directs".

order

see Rule 4.91 of the Insolvency Rules 1986 ("Rule 4.91") when read together with the Insolvency Act 1986, section 247(2); (e) If rights under the Scheme are to correspond with rights in an insolvent winding up to which the Scheme is the alternative the correct provision for currency conversion is conversion at the date as at which claims are to be ascertained for the purposes of distribution under the Scheme i.e. the Correct Conversion Provision; (f) The Proposed Conversion Provision treats holders of Dollar Notes in a manner which is materially more favourable, and treats the holders of Sterling Notes in a manner which is materially less favourable, than if the Correct Conversion Provision were used, and thus discriminates in favour of the former at the expense of the latter; and (g) Discrimination in this manner would result in unequal distribution as between two groups of creditors who would rank equally in a winding up, and therefore would infringe the pari passu rule which exists to promote fairness. " order: "I think the tree must lie as it falls; that it must be ascertained what are the debts as they exist at the date of the winding up, and that all dividends in the case of an insolvent estate must be declared in respect of the debts so ascertained. " 24. On this principle, no allowance is made for interest accruing after the date of the winding up order (the Humber Ironworks case) or subsequent exchange rate fluctuations which affect the sterling value of a debt in foreign currency: Inre Dynamics Corpn of America [1976] 1 WLR 757; Inre Lines Bros Ltd [1983] Ch 1. 28. Secondly, as Oliver J explained in the Dynamics Corpn case [1976] 1 WLR 757,764, the purpose of the rule that debts are valued at the date of winding up is to give effect to the principle of pari passu distribution. It is a principle of fairness between creditors: "It is only in this way that a rateable, or pari passu, distribution of the available property can be achieved, and it is, as I see it, axiomatic that the claims of creditors amongst whom the division is to be effected must all be crystallised at the same date….for otherwise one is not comparing like with like… " 29. The image of collecting and uno flatu distributing the assets of the company on the day of the winding up order is a vivid one, but the courts apply it to give effect to the underlying purpose of fair distribution between creditors pari passu and not as a rigid rule. Section 136(a) of the Companies Law (2002 rev) provides that "the property of the company shall be applied in satisfaction of its liabilities pari passu…" The principle of valuation at the date of winding up ensures that distribution among creditors is truly pari passu. It would, however, be pure conceptualism to apply it so as to require payment of a dividend to someone who, at the time of distribution, is not a creditor at all. "

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