High Court Rules on Class Composition and Jurisdiction in Lecta Paper UK Limited Scheme of Arrangement Application

Introduction

In the matter of Lecta Paper UK Limited, the High Court considered an application for an order convening a meeting of creditors to approve a proposed Scheme of Arrangement under Part 26 of the Companies Act 2006. The judgment by Mr Justice Michael Green addresses the relevant legal principles pertaining to the Scheme, class composition, jurisdiction, and other procedural aspects concerning the restructuring of the company’s financial obligations.

Key Facts

Lecta Paper UK Limited, part of a leading European paper manufacturing and distribution group, faced a significant financial downturn due to market and operational pressures. In response, the company proposed a Scheme of Arrangement involving the restructuring of Senior Secured Notes, proposing new notes (New SSNs) with an extended maturity date and complex interest terms.

Two key issues were scrutinized during the convening hearing: whether the Court has jurisdiction in relation to the Scheme and whether all Scheme Creditors should vote in a single class, as the Company had proposed.

Legal Principles

Class Composition

A critical legal principle discussed in this case is the class composition requirement for Schemes of Arrangement. The Court referred to the test in Sovereign Live Assurance v Dodd, which dictates that a class must include those persons whose rights are not so dissimilar as to make consulting for a common interest impossible.

In applying this principle, Mr Justice Michael Green examined the rights of the Scheme Creditors absent the Scheme and under the Scheme, determining that their rights are materially the same and thus can properly constitute a single class. Differences in interest rates between the two series of notes were not considered a significant barrier to forming a single class, nor were other potentially differentiating factors such as lock-up agreement consent fees, rights under the New Money Facility, or pre-emptive rights under the Articles of Association.

The judgment also cites Re Codere Finance 2 (UK) Ltd, which deals with situations where arrangements pertaining to new funding do not necessarily demand separate classes if the core restructuring terms are uniformly applicable.

Jurisdiction

On the issue of jurisdiction, the Court considered whether the Scheme fell within Part 26 of the Companies Act 2006, regarding ‘compromises or arrangements’ with creditors. The governing law of the Senior Notes had been changed to English law, which strengthens the connection with the jurisdiction. The Court also acknowledged the potential for enforcement across Europe, to be considered at a later sanction hearing.

The Court also assessed procedural fairness regarding the notice of hearing and the propriety of amendments to the Explanatory Statement directed at the Scheme Creditors, finding them satisfactory.

Outcomes

Mr Justice Michael Green directed that a single class meeting of creditors be convened to consider the proposed Scheme, conforming to the class composition principle that favours inclusivity where rights are not significantly divergent. Furthermore, the Court affirmed its jurisdiction over the Scheme under Part 26 and its role as a legitimate ‘compromise or arrangement’. Necessary amendments and clarifications to the Company’s Explanatory Statement were also approved.

Conclusion

In conclusion, the judgment in the case of Lecta Paper UK Limited reaffirms important legal principles surrounding class composition and jurisdiction for Schemes of Arrangement under Part 26 of the Companies Act 2006. The Court determined that the Scheme Creditors could consult together for a common interest, thereby authorizing a single class meeting. The Court also confirmed its jurisdiction over the matter, consolidating English jurisdiction over the financial restructuring of companies operating within its scope. This case serves as a forerunner in guiding future applications for Schemes of Arrangement, particularly in similar financial restructuring scenarios.