case1 - lek vs pwc

8/4/2019 Case1 - LEK vs PwC

1/26

Neutral Citation Number: [2009] EWHC 2114 (Ch)

Case No: 15856 OF 2009

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 11/08/2009

Before :

MR JUSTICE MANN- - - - - - - - - - - - - - - - - - - - -

IN THE MATTER OF BLUEBROOK LTD

- and -

IN THE MATTER OF IMO (UK) LTD

- and -IN THE MATTER OF SPIRECOVE LTD

- and -

IN THE MATTER OF THE COMPANIES ACT 2006

- - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - -

MR. R. DICKER Q.C. and MR. R. FISHER(instructed by Latham & Watkins (London)

LLP) for the Companies.

MR. D. CHIVERS Q.C. and MR. S. HORAN (instructed by Gide Loyrette Nouel LLP) for

the Mezzanine Co-ordinating Committee.MR. G. MOSS Q.C. and MR. A. AL-ATTAR(instructed by LovellsLLP) for the

Senior Steering Committee.

Hearing dates: 3rd, 4th and 5th August 2009

- - - - - - - - - - - - - - - - - - - - -

JudgmentMr Justice Mann :

Introduction

1. This is an application for the courts sanction of three schemes of arrangement, eachof which is between one company and lenders described as Senior Lenders. Those

companies are Bluebrook Limited (Bluebrook), IMO (UK) Limited (IMO) and

Spirecove Limited (Spirecove). On 3rd July 2009 Arnold J made an order

convening meetings of the scheme creditors, and those meetings took place on 29 th

July 2009. At each of the meetings the schemes were approved by a majority which

very significantly exceeded the statutory majority, so that the relevant class of

creditors approved each of the schemes. Only two members of that class in number,

amounting to no more than 5% of the debt, voted against. The present challenge to

these schemes comes not from those two creditors, or indeed from any member of the

class of scheme creditors. Instead, it comes from representatives of a class of

subordinated creditors. They maintain that the schemes operate unfairly to them


2/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

because they deprive them of any valuable rights against the companies. Whether that

is right or not is the question that I have to decide at this stage of the proceedings.

Background

2.

Bluebrook is the holding company of a group of companies which operates the biggest carwash business in the world. The business is operated by a number of

subsidiaries in a number of countries around the world. IMO and Spirecove are

indirect subsidiaries of Bluebrook. Bluebrook is indebted to a consortium of lenders.

This is the Senior Debt, and for present purposes its current amount can be taken as

being 313m. The value varies a little depending on the sterling/euro exchange rate.

The indebtedness is guaranteed by other companies in the group, including IMO and

Spirecove. The indebtedness is supported by a range of debentures under the security

so as to charge the value of the group. The lenders under these transactions are called

the Senior Lenders.

3. Spirecove is indebted to another group of lenders, called the Mezzanine Lenders. Thelevel of this debt can be treated in round terms as being 119m (including unpaidinterest). Again, that indebtedness is secured by a range of securities covering the

assets of the group. The actual trading is carried out by companies lower down in the

group. Their various identities do not matter for the purposes of this judgment.

4. Various subordination arrangements are in place which firmly subordinate theMezzanine Lenders to the Senior Lenders. The arrangements are contained in an

Intercreditor Agreement dated 8th February 2006 (as amended, restated and

supplemented from time to time). I do not need to set out the detailed provisions of

that agreement. I can summarise the relevant provisions as follows:

i) Clause 2 deals with the ranking of the debt. The Senior Debt ranks first; theMezzanine Debt ranks second. (They are followed by other levels of debt

which I do not need to deal with).

ii) Clause 6 deals with the subordination of the Mezzanine Debt. In essence,repayment of the Mezzanine Debt cannot be made, or sought, until the Senior

Debt has been paid. Clause 6.8 is a turnover clause; - if any of the

Mezzanine Lenders receive a payment in respect of its debt, which is not

permitted under the Intercreditor Agreement, then it will pass it on to the

Senior Lenders.

iii) Under clause 11.4 the security agent under the agreement is given authority byall the creditors to release security and to release liabilities in respect of any

enforcement action by any of the creditors, provided that any proceeds from

enforcement are applied in accordance with the Intercreditor Agreement (i.e.

from the top down).

iv) Under clause 12 the Mezzanine Lenders are given an important right. In theevent that they are not content with certain enforcement actions, they can

compel a sale to them of the rights and obligations of the Senior Lenders for

the amount of the outstanding Senior Debt.


3/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

v) Clause 13 provides that on the occurrence of an Insolvency Event (winding up,administration and so on) the Mezzanine Debt is subordinate in right of

payment to the claims of the Senior Debt.

vi) Clause 14 provides for the proceeds of any enforcement to be applied (aftercertain fees, costs and expenses) in discharge of the Senior Debt and then theMezzanine Debt and so on.

5. Thus the prospect of recovery by the Mezzanine Lenders is very firmly subordinatedto the prior rights of recovery of the Senior Lenders. No-one has questioned the

efficacy of those arrangements in the hearing before me.

6. The funding arrangements which are organised by the Intercreditor Agreement weremade in 2006. Since then the group has not performed according to expectations,

with the result that interest is now significantly in arrears. The group performance

falls short of various targets specified in the Senior Credit Agreement covering the

Senior Debt (principally the various financial covenant ratios based, directly orindirectly, on the EBITDA earnings before interest, tax, depreciation and

amortisation). Interest due to the Senior and Mezzanine Lenders has not been paid,

and the boards have considered that it cannot be paid fully into the future either. The

boards are concerned that they cannot pay debts as they fall due, and that the group is

balance sheet insolvent. The group has sought to come to a restructuring arrangement

with the Senior Lenders and, for a time, with the Mezzanine Lenders. Negotiations

have been in process for some months. The plans involved the Senior Lenders giving

up some of their debt in exchange for equity, with the business of the group being

transferred to a new corporate structure containing new companies in order to achieve

that. The new group would be principally owned by the Senior Lenders; the existing

group would not retain an interest. At one stage of the negotiations there was aproposal to allow the Mezzanine Lenders to participate in the form of share warrants,

but that was abandoned and since then the proposals that have been made have not

included any new rights for the Mezzanine Lenders.

7. The current proposals are embodied in the schemes of arrangement for which thecourts sanction is sought, coupled with other transactions to give effect to a partial

debt-equity swap. Its elements are as follows:

i) There will be a restructured group consisting of three companies HoldCo,MidCo (a wholly-owned subsidiary of HoldCo) and NewCo (a wholly-owned

subsidiary of MidCo) and a transferee of certain German assets. The equity inHoldCo will ultimately be owned by the Senior Lenders, subject to a certain

amount of dilution in favour of members of the management of the group.

ii) The Senior Debt will, to the extent necessary, be accelerated and demands for payment will be made against the three scheme companies and certain other

transferors.

iii) Following this sanction hearing, and conditional upon sanction being given,the various transferor companies will be placed into administration and each of

the transferor companies (including the three scheme companies) will be

requested by the Security Agent under the present lending arrangements to


4/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

enter into asset transfer agreements to transfer all the assets from the present

group into the restructured group.

iv) 12m of the existing Senior Debt will remain in the existing group. A large part of the rest (approximately 185m) will be novated to a company in the

new group. The remainder of the debt will be substituted by the SeniorLenders taking the shares in HoldCo. The old group will be released from the

debt other than the 12m being left behind.

v) The transfer of assets to the new group will be done by an administrator. Theevidence when it came before me was somewhat coy as to the reason why the

administrator, rather than the various boards of directors, were effecting the

transfer. It transpired that this was because it was considered by the boards to

be better to have an insolvency practitioner, an independent third party,

consider the transfer, and its propriety at the relevant values. Even though the

administration is to be a pre-packaged administration, with the intended

administrator being kept fully informed of everything that is going on, therecan, of course, be no guarantee that the administrator will, at the end of the

day, effect the various transfers. However, if the transfers do not happen, then

the rest of the overall transaction does not happen either.

vi) The three schemes deal only with the mechanism of the release of the schemeclaims (the Senior Debt) in anticipation of the exchange for the shares in

HoldCo and the debt owed by the new group. The schemes do not themselves

provide for the transfer of assets. As was pointed out, it would technically

have been possible to have achieved the same result as that achieved by the

schemes and the overall arrangements without the necessity for a scheme of

arrangement had all the Senior Lenders been in agreement and participated.However, because a small minority does not agree, a scheme becomes

necessary.

vii) The overall restructuring still involves the use of the enforcement processes ofthe Intercreditor Agreement, including the compulsory release of security and

guarantees held by the Mezzanine Lenders and the transfer of assets that that

document enables.

The objections to the scheme in outline

8. That, then, is where the three schemes of arrangement fit into the restructuring proposals. The overall effect is to transfer all the assets of the group into the newgroup and to give the Senior Lenders the bulk of the equity in that new group (subject

to the small interest in favour of the management). A large part of its debt is novated.

No assets will be left in the group in order to pay the Mezzanine Lenders, who are

thereby shut out. Justification for that is said to be that the value of the group is such

that the Mezzanine Lenders (and any further subordinated lenders) have no economic

interest in the group because the value of the assets (or the value of the group as a

whole) is significantly and demonstrably less than the value of the Senior Debt.

9. On the basis of all that, the companies have propounded the schemes and propose tocompromise with only the Senior Lenders. They do not seek to enter into anycompromise with the Mezzanine Lenders. Accordingly, they are not party to these


5/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

schemes, and they were not summoned to any class meeting. The case of the scheme

companies, and of the Senior Lenders, is that that is entirely appropriate in the

circumstances. It is technically not necessary to call a meeting of the Mezzanine

Lenders if they are not to be party to the schemes, and none of the companies has to

promote a scheme as between itself and the Mezzanine Lenders if it does not wish to

do so. So far as the Mezzanine Lenders are concerned, the key step is the transfer ofthe assets from the present group to the new group. That is not affected by the

scheme; it takes effect outside the schemes, albeit it is conditional on the schemes

being sanctioned.

10. Many of the Mezzanine Lenders do not accept that the schemes should be sanctioned.They have formed a Mezzanine Co-ordinating Committee (MCC) which has been

represented before me by Mr David Chivers QC. I can treat the MCC as being

synonymous with the Mezzanine Lenders for the purposes of this judgment. They say

that the schemes are unfair because they unfairly prejudice them. Their key point is

that they do not accept that the value of the groups assets is less than the value of the

Senior Debt. They say that the fair and reasonable thing to do would be to allow theMezzanine Lenders to participate in the new group by giving them an interest which

gives the Senior Lenders the first right to have their debt repaid, and a proper return

for their equity, but which does not absorb all the equity after those things have been

done. Further, they say that the Schemes should not be sanctioned because the overall

arrangements shut out the Mezzanine Lenders from any prospect of benefiting from

the assets, and there are sufficient prospects of their having an economic value in

them as to lead to their not being ignored in this way.

The supporters of the schemes before me

11. The Senior Lenders have formed a Senior Steering Committee (SSC) to propoundthe interests of the Senior Lenders. Its representatives hold almost 60% of the Senior

Debt, and they were represented before me by Mr Gabriel Moss QC. The scheme

companies were represented by Mr Robin Dicker QC.

The valuation evidence

12. The scheme companies have procured, or engaged in, various valuation exercises, allof which, if valid, show that the value of the group is very significantly less than the

uncontested, and uncontestable, value of the Senior Debt. In those exercises the

group, or its holding company, is sometimes identified as IMO, rather than

Bluebrook. As long as that is understood, the distinction does not matter. Thoseexercises were as follows.

13. PricewaterhouseCoopers LLP (PwC) were instructed by the scheme companies andthe Bank of Scotland plc (as lead senior lender) to produce a report to analyse the

value of the group for the insolvency practitioner in waiting, that is to say the

person who it was intended to be the administrator in the pre-packaged administration

that would intervene if the restructuring took place. They were first instructed on 2nd

March 2009 and carried out their first exercise as at 9 th March 2009. They updated

their report in June. The report carried out a valuation of the group on various bases.

It is clear that the report valued the group on a going concern basis, and not on a

liquidation or even a fire sale basis. That is made clear from the summary of theirinstructions and their express basis of valuation. The objective was to come up with a


6/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

figure, or range of figures, for the Business Realisation Proceeds, which they define

as the amount that the business is expected to realise in a sale at the current time.

They adopted the following methodologies:

i) An Income Approach. The Income Approach indicates Business RealisationProceeds based on the cash flow that the business can be expected to generatein the future. This is a discounted cash flow (DCF) basis. In this approach

they added an alpha factor to the cost of capital to reflect uncertainty in the

market and the impact of the present credit crunch on the availability and cost

of financing. It had the effect of depressing the final valuation figure.

ii) A Market Approach. The Market Approach indicates Business RealisationProceeds based on a comparison of IMO to comparable publicly traded

companies and an analysis of statistics derived from transactions in its

industry.

iii) A leveraged buy-out (LBO) analysis. .we have considered how a potential private equity purchaser could look to fund a deal for IMO by performing a high-level debt capacity analysis. We have then used this debt

capacity to assess, to a LBO model, the level of equity investment a private

equity investor could be prepared to make, given a typical required equity rate

of return, in the current market.

14. The valuation exercises are conducted, where appropriate, on the basis of certainassumptionsfor example an assumption of zero growth in the terminal year (for the

DCF calculation) and certain reasoned assumptions as to the Weighted Average Cost

of Capital (WACC). The assumptions are clearly articulated and the reasons for

them are clearly given. Having considered all these matters, and having set out thedifficulties in finding proper comparables on the basis of the approach to which they

are relevant, the valuation demonstrates the following ranges of estimated Business

Realisation Proceeds:

i) Income Approach a range of 220m to 275m as at 9 th March 2009. Therange reflects various sensitivities to which the transaction is subject.

However, bearing in mind the then current market conditions, it was thought a

more reliable indication of the top figure would be 250m. By June factors

had caused them to raise one of the multiples to which the transaction was

subject, but nevertheless they came to the conclusion that there was no change

as at 3rd June 2009.

ii) On the Market Approach their estimate for Business Realisation Proceeds as at9th March was 220m to 250m. Because of the change in market and

economic conditions by 3rd June, as at that date they revised their estimate

upwards to a range of 235m to 265m.

iii) As to the LBO analysis, it came up with a range of 227m to 256m. They didnot change this in considering the position as at 3rd June.

15. Accordingly, PwC estimate that a purchaser would pay a sum not exceeding 265mfor the business.


7/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

16. In considering a way forward, the directors instructed Rothschild to pursue a thirdparty sales process with a view to seeing if a buyer for the existing group could be

secured. Details of Rothschilds activities have been provided. They contacted a

number of potential financial buyers, and were in turn contacted by 12 additional

potentially interested parties. The process produced only one indicative offer which

placed a value on the enterprise of 150m to 188m on a cash and debt free basis.This was not considered by the board to be an appropriate level of interest, or a

worthwhile level of cash, to take further.

17. The third valuation exercise involved instructing King Sturge LLP to value a numberof the groups sites, and then instructing PwC to extrapolate an overall value from the

valuation of those sites. The valuation resulting from this exercise was one of 164m

on a restricted sales basis (i.e. a swift sale without a full marketing campaign, the sort

of thing a mortgagee may be entitled to do) and 208m on a full market value basis.

18. It will be apparent from those three exercises that they all generate figures which fallwell short of the value of the Senior Debt (313m). Evidence was also given that evenif one strips out the alpha factor which PwC used, the value is still well short of the

level of the Senior Debt. Mr Dicker says that that is the conclusion that I should reach

on valuation. He says this is supported by the fact that the valuation of the Senior

Debt in the market is, even after the promulgation of the schemes, very significantly

below parcurrently around 60p in the pound.

The LEK report

19. In all the negotiations leading up to the schemes, the Mezzanine Lenders did notproduce their own valuation evidence in order to justify their stance. However, in the

course of these proceedings they have produced some evidence. It is a report fromLEK Consulting and is dated 1st July 2009. It carried out a DCF analysis and comes

to the conclusion that:

The IMO Car Wash business is extremely sound and

profitable.

In paragraph 2.3 it criticises a market price valuation, on the footing that there is no

liquid market for an asset such as the scheme companies. In those circumstances a

market price valuation is not an appropriate way of ascertaining the value of the

group, especially in the current economic circumstances. Criticisms are made of the

Rothschild marketing exercise, suggesting that any bids would be likely to be on afire sale basis, that bids would be affected by the difficulty of securing finance for

the business and by the general current economic circumstances and that the illiquid

market would deter bids. A valuation method based on comparables is said to suffer

from an absence of proper comparables, and a break up/liquidation valuation is

inappropriate to a sale as a going concern. In the circumstances, LEK consider that

the most appropriate method of valuation for the group is a DCF analysis in which the

group is valued on an ongoing basis.

20. The report then goes on to indicate the fruits of such analysis. Any such analysisrequires a number of assumptions to be made. In PwCs analysis they set out those

assumptions. The LEK report does not set them out, and they were not provided untilthe evidential stages of this hearing when it was pointed out that that material was


8/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

absent from the report. The report does not then go on to set out LEKs view of the

value. Instead, it undertakes a Monte Carlo simulation which involves repeated

calculation of the DCF valuation, using random sampling of input and assumptions,

and then aggregating the result into a distribution of the probabilities of different

valuation outcomes to show the relevant likelihood of this potential set of

outcomes. The result is a graph which is said to show that in each scenario asignificant majority of outcomes exceeds 320m. The conclusion is expressed that:

On this basis, it appears highly likely that the value of IMO

breaks in the Mezzanine tranches of IMOs current debt

structure.

21. The report then carries out two other valuation exercises, one a comparabletransactions valuation and the other a comparable multiples valuation. The first, using

five precedent transactions as a basis for valuation, comes up with a valuation of

about 330m. The second is used to provide an indicative valuation to provide

further broad support to the DCF method. LEK took five comparable publiccompanies from an original set of 12 adopted by Rothschild and PwC, plus another

four. They were selected on the basis of having similar characteristics to the group.

Various data was extracted from those companies and applied to figures for the group.

From this (unreasoned and unsupported in the report) LEK derive a valuatio n range

whose lower end is in excess of 300m on average, with a median valuation of circa

385m.

22. This report is the material relied on by the Mezzanine Lenders in support of their casethat they have an economic interest. There was no cross-examination of the author of

this report (or of the other reports).

The principles

23. The broad principles on which I should act in determining the dispute between theMCC on the one hand and the company and the SSC on the other were not seriously

in dispute, though each side emphasised different aspects. The principles appear in

the following paragraphs.

24. A company is free to select the creditors with whom it wishes to enter into anarrangement and need not include creditors whose rights are not altered by the

scheme. This appears from Sea Assets Ltd v Pereroan etc Garuda Indonesia [2001]

EWCA Civ 1869 and In re British & Commonwealth Holdings plc [1992] 1 WLR672. Prima facie, therefore, the company is entitled to select the Senior Lenders as

being those with whom it wishes to enter into a scheme and not enter into a scheme

with the Mezzanine Lenders as well. Of course, whether that scheme can ultimately

be effected, or will be sanctioned, is another matter. At this stage the question is one

of choice of counterparty.

25. Next, in promoting and entering into a scheme, it is not necessary for the company toconsult any class of creditors (or contributories) who are not affected, either because

their rights are untouched or because they have no economic interest in the company.

This is apparent fromIn re Tea Corporation Ltd[1904] 1 Ch 12, where the Court of

Appeal held that the dissent of ordinary shareholders would not stop a scheme beingsanctioned, because although those shareholders had a technical interest as


9/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

shareholders, they in fact had no economic interest in the company because the assets

were insufficient to generate a return to them in the liquidation that was then on foot.

As Vaughan Williams LJ said (at page 23):

It would be very unfortunate if a different view had to be

taken, for if there were ordinary shareholders who had really nointerest in the company's assets, and a scheme had been

approved by the creditors, and all those were really interested

in the assets, the ordinary shareholders would be able to say

that it should not be carried into effect unless some terms were

made with them.

If there is a dispute about this, then the court is entitled to ascertain whether a

purported class actually has an economic interest in a real, as opposed to a theoretical

or merely fanciful, sense, and act accordingly - see the reasoning in In re MyTravelGroup plc [2005] 2 BCLC 123 at first instance. Where things have to be proved, the

normal civil standard applies. The same case indicates that the mere fact that thepossibility of establishing a negotiating position and extracting a benefit from a deal is

not the same as having a real economic interest (though obversely a real economic

interest may establish, or enhance, a negotiating position). The basis on which the

assessment of that interest is to be carried out will vary from case to case.

26. The schemes do not involve the Mezzanine Lenders in the sense of engaging them as parties. They will not bind them, and their legal rights are unaffected. The

Mezzanine Lenders therefore cannot, and do not, complain as persons whose legal

rights are being altered by the schemes in some unfair way. However, they are still

entitled to object as creditors on grounds of unfairness if the schemes unfairly affect

them in ways other than altering their strict rights. The court is exercising adiscretion, and as a matter of principle can consider unfairness in that sense, if it is

made out. That is the essence of the case of the Mezzanine Lenders.

The main case in favour of the schemes

27. The debate before me concerned the grounds of opposition of the MCC. Otherquestions as to the general fairness of the schemes, and as to the propriety of

sanctioning them, were not fully dealt with and I do not propose to deal with that

aspect here. Having seen the schemes generally, nothing has yet struck me as to why

I should not sanction them if the complaints of, or raised by, the MCC do not stand in

their way. The meetings seem to have been properly convened and held, andappropriate majorities of those who were summoned were obtained on the resolutions

proposed. Although there was a small number of dissentients, they have not sought to

be represented before me. As far as I can see, prima facie it would have been right for

me to sanction the schemes if the MCC had not objected. I will not formally

determine that at this point, because Mr Dicker told me that there were some minor

points that he intended to draw to my attention at that point but which were not dealt

with during the course of the two and a half days of the hearing before me (in the

interests of saving time and focusing on the major issues). However, I will address

the points raised by the MCC on the assumed footing that, absent those complaints, I

would sanction the schemes.


10/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

28. The three scheme companies say that the Mezzanine Lenders cannot properly objectto the schemes. They are not formally bound by them, and their legal rights are

unaffected by them. In the light of the valuations of the assets that have been

obtained, the Mezzanine Lenders are not indirectly affected by them either because

they have no economic interest in the companies. They accept that if a proper case of

de facto unfair prejudice could be shown by the Mezzanine Lenders, or that there hasbeen some other impropriety which has led to unfairness, then that might be a ground

for the courts not sanctioning the schemes. However, the Mezzanine Lenders have

not established any such thing. The Senior Lenders support that stance.

29. The scheme companies and the Senior Lenders also developed points in answer tocomplaints of the Mezzanine Lenders. One particular point which was emphasised

was that the arrangements essentially gave effect to the subordination to which the

Mezzanine Lenders had been plainly and freely agreed. I will deal with those points

(so far as relevant) in the discussion and narrative that appears below.

The case put against the schemesin detail

30. The case put against the schemes developed during the course of Mr Chiverssubmissions. In outline it took the following form:

i) A proper view of the value of the companies (the intrinsic value)demonstrated that there was a realistic possibility that they had a value which

exceeded the Senior Debt, so that the companies had a real value to the

Mezzanine Lenders notwithstanding their subordination.

ii) That value was being lost to them, because the assets were being stripped outfor the benefit of the Senior Lenders.

iii) The directors of the scheme companies had failed to comply with what wassaid to be their obligation to extract a proper benefit for the creditors of the

scheme companies (other than the Senior Lenders), and in particular for the

Mezzanine Lenders. There were other courses of action open to them which

did not involve joining these schemes, or falling in with the wishes of the

Senior Lenders, and they should at least have considered, or possibly

threatened, one or more of these. On the facts they had a negotiating position

which they could and should have exploited so as to extract some benefit for

the Mezzanine Lenders. They did not do so, and seem to have been adopting a

position of just looking at the position of the Senior Lenders.

iv) The scheme companies obtained no benefit from the schemes and therestructuring. True it is that that debt was released, but in the circumstances

that did not amount to a benefit. Even if debt was released in excess of the

value of the present value of transferred assets, that was not a benefit because

there was no benefit to an assetless company in having a lower final debt than

would otherwise be the case because it had no assets to pay them anyway.

v) The 12m debt left in the companies was there as a blocker to make it moredifficult for the Mezzanine Lenders to make any claim against the companies

or directors, because that 12m would be absorbed by the Senior Lendersunder their still existing charge.


11/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

vi) Mr Chivers took a point, albeit only relatively faintly, that the schemes did notamount to a compromise or arrangement within the meaning of section

899(1) of the Companies Act 2006.

vii) All in all the schemes were part of a restructuring that was unfair to thecreditors of the companies (other than the Senior Lenders) because of the

benefits that it provided to the Senior Lenders which were very likely to come

about. The Senior Lenders were not really taking any, or much, risk, and it

was very likely that they would be rewarded.

31. Some of these points tend to inter-relate; some of them have to be consideredseparately.

The state of the company

32. A large part of the Mezzanine Lenderss case depends on what the directors shouldhave done, and various options open to the scheme companies when they startedconsidering the scheme. Accordingly it is necessary to consider what the financial

state of the group was or appeared to be.

33. The Senior Debt and the Mezzanine Debt arose in order to fund the acquisition of thetrading arm of the group in 2006, and to provide funds for capital expansion by 31st

May 2009. 2008 was not a good year for the group, and its earnings fell significantly

short of its business plan. The first half of 2009 was better, in large measure because

of the strengthened euro against the pound. Nonetheless, in the second half of 2008

the boards became concerned that the group would breach the financial covenants in

the two major credit agreements, which would give rise to events of default. Under

the Senior Credit Agreement an event of default entitles the Senior Lenders to call inthe debt and declare the security to be enforceable. The boards fears were justified

and certain ratios specified in the two agreements were inadequate for compliance

with those agreements. Since the equity holders did not remedy them, they have

become irremediable events of default under both agreements. In addition, interest is

now in arrears under both agreements - the group failed to pay interest payments of

13.6m to the Senior Lenders, and 5.4m to the Mezzanine Lenders, when payments

were due on 31st March 2009. Further liabilities of almost 1m are due to the Senior

Lenders on hedging transactions. Various other events of default have arisen.

34. The group is now balance sheet insolvent to the tune of over 300m, albeit after awrite-off of 360m of goodwill in the accounts. The goodwill that was written offappears to be goodwill arising on the purchase of the group in 2006, being the excess

of the purchase price paid over the value of the net assets that were acquired. There

was some limited discussion as to the real significance of this insolvency arising as a

result of the write-off, and some criticism from the MCC as to correctness of the

write-off (or whether all of it should be written off), but the figures show that a write-

off of anything over 35m of that goodwill would still lead to balance sheet

insolvency. While the group is meeting its trading debts, it cannot pay all its debts as

they fall due as is demonstrated by the non-payment of interest, apart from anything

else.

35. The group is still able to trade, and is capable of trading profitably on its tradingactivities. The mere fact of technical defaults under the major loan agreements does


12/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

not, of itself, directly affect this. However, there is evidence of increasing difficulties

on the trading side too. Some credit insurance has been withdrawn for the UK and

France, which impacts on supplier confidence. Difficulties with suppliers are

beginning to arise - I was provided with evidence of difficulties in obtaining

quotations for long term electricity supplies.

36. Because of a standstill arrangement with the Senior and Mezzanine Lenders andsubsequent forbearance of the former, the group has got sufficient cash reserves to

meet its immediate needs and trading liabilities. However, the board has come to the

conclusion that a restructuring of the business is required to secure its long term

future. Mr Russell, a director of the scheme companies, has said that the boards do

not believe that in the absence of restructuring, available cash resources will be

sufficient to continue to run the business as a going concern. His first witness

statement said that if the present proposed restructuring does not proceed, the boards

may themselves have to take steps to place the group in an insolvency procedure. A

later paragraph was firmer - he expressed the directors view that in the absence of

either the present or an alternative restructuring, they will have to petition for someform of insolvency proceedings for most, if not all the Existing Group companies in

order to protect their assets because enforcement ofsecurity would be likely to occur

and the level of performance of the group is such that the current level of debt has

become unsustainable.

37. The view that a restructuring is required is shared by the SSC, and indeed by MrDouglas Evans, an officer of one of the Mezzanine Lenders who has responded to Mr

Russells evidence. He has agreed that without an appropriate capital restructuring

the scheme companies will have a continuing difficulty in satisfying their financial

covenants and they need a capital restructuring which reduces the debt on the balance

sheet to a sustainable level and which resets the financial covenants. The MCC issaid to recognise that.

38. So there was no dispute between the protagonists before me that a restructuring wasrequired. The group cannot carry on as it is. However, I have had to set out some of

the background because, despite that shared view, the MCC has suggested that the

board should at least have threatened to carry on as things are. I will have to return to

that suggestion below.

The valuations revisited

39. Various valuations were in evidence. I have described them, and their general effect,above. However, it is necessary to return to them in more detail because value is one

of the factors which lies at the heart of MrChivers case. He says that the evidence

shows that there is real value in the companies in excess of the Senior Debt, or what

the Senior Lenders are paying under the proposed arrangements (in essence, the value

of the Senior Debt less 12m), or at least there is a realistic chance that there is such

an excess (which he says is enough for him) and the valuations demonstrate that it is

likely that the Senior Lenders will realise that value for themselves. Some of it should

have been made available for the Mezzanine Lenders.

40. Mr Chivers spent a significant portion of his skeleton argument arguing in favour of agoing concern valuation as opposed to a liquidation valuation. I agree that, for the

purposes of this case, and in order to assess the fairness of the schemes, a going


13/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

concern value is appropriate, and indeed the scheme companies and the SSC did not

contend otherwise. The point has therefore been rendered academic, and is further

rendered academic by the fact that none of the valuations produced for the scheme

companies is in fact a liquidation valuation in the sense of a break-up valuation. All

of the valuations seek to answer the question of what a purchaser would be likely to

pay now for the business, and they adopt different techniques for that purpose. TheRothschild exercise was started shortly after the end of March 2009 and ended on

29th May, the King Sturge report was commissioned in May 2009, and the PwC

report was commissioned in March 2009 (and updated later).

41. Those do not, of course, show a valuation which is capable of generating value for theMezzanine Lenders. However, Mr Chivers relies on the LEK report as showing value

for the Mezzanine Lenders. He points out that there has been no cross-examination of

any of the valuers on the reports and says that in those circumstances I should treat the

LEK report as being at least a reasonable view which cannot be disregarded. That

means that there is a realistic view that there is value in the group over the value of

the Senior Debt, which gives the Mezzanine Lenders an economic interest in thegroup.

42. There was indeed no cross-examination of the valuers, so they have not been tested.In the case of the LEK report the absence of cross-examination also means that, at

least to me, some of its methodology, and some inferences from it, remain obscure.

However, it does not follow that all of them are necessarily entitled to equal weight. I

am entitled to look at them and try to ascertain just what they are saying, in order to

determine the extent to which they assist in the relevant debate.

43. I have already observed that the three exercises conducted for the boards wereintended to derive a present value in the sense of the sort of money that a purchaserwould pay. They all have their drawbacks, but they are aimed to the same end.

Where it is necessary to make assumptions for the purposes of the exercises, those

conducting them tend to have made assumptions based on professional and expert

judgments as to which are appropriate in the circumstances (those judgments

sometimes encompassing a limited range). The LEK valuation is different. Its end

result is a statistical analysis, conducted by a computer, in order to assess the

statistically most likely outputs for variations in a range of inputs which can be quite

wide. It does not involve the sort of judgments that a more traditional valuation

requires. That is not to say that there is no judgment at all involved. Judgment is

involved in selecting the ranges. Mr Chivers suggested that there was some judgment

applied in selecting some weighting within the range, but I confess that I cannot seethat in any of the supporting evidential material. Nor does it appear to be the

understanding of Mr Merrett, a managing director of Rothschilds who has considered

the exercise on behalf of the scheme companies (judging by paragraph 21 of his 3rd

witness statement). In any event, judgment lies principally in determining the

extremes of the input ranges.

44. The result is what Mr Merrett, managing director of NM Rothschild & Sons Limited,described as a robotic exercise. He said, and Mr Southern of LEK accepted, that

using a Monte Carlo simulation is not often used in valuation exercises. Its use is not

unknown in that context - it can be used in specialist circumstances such as a

pharmaceuticals company where underlying earnings are uncertain, or in oil

companies where the simulation can be used for estimating underground reserves.


14/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

However, in Mr Merretts view that degree of uncertainty does not exist in this case,

because there is a relatively well-established business model. Mr Southern, of LEK,

says that uncertainty is demonstrated by the uncertainties arising out of the current

economic environment, and from the different attempts of the advisers to provide a

value for IMO (being the company where the value is considered to lie). That,

however, seems to me to be a different sort of uncertainty from that referred to by MrMerrett. Any DCF valuation is going to have some uncertainties in it - a number of

assumptions have to be made as to the future. Yet it is not suggested that a Monte

Carlo technique is appropriate to every DCF calculation. Nor is relevant uncertainty

(making the technique applicable) demonstrated by the different approaches, or

results, of different valuers - that sort of uncertainty is inevitable where professional

judgment is involved.

45. The merits of a Monte Carlo technique are also said to lie in the fact that it produces arange of values, rather than a single point value, and that is said to be appropriate

where single point certainty cannot be said to be achievable. I am sure that it is right

that a correct approach to valuation in many cases will be to specify a range. Unlessthe market is tested, and a large number of purchasers all make the same offer, there

will always be something of a range. Indeed, the valuations obtained for the group

suggested ranges. However, the Monte Carlo technique seems to me to produce not

so much a range of values, professionally assessed, but a range of possibilities. From

that one may be able to get to a view as to a value, but that is where professional

judgment comes in. The results of the application of the technique are not necessarily

irrelevant to a valuation exercise, but they are not expressed as a value, and so are of

limited use. They might be used as a step towards valuation (when some more

judgment has been applied) but they are not themselves a valuation. To some extent

the drawbacks of the technique can be seen from Mr Southerns own evidence. In his

first witness statement he said that, if it is of interest to examine a single pointestimate, as opposed to a range, of value, then that is available in the form of median

and mean values shown (385m and 398m respectively). That is plainly a

mechanical, and not judgmental, assessment, and is highly technical. A proper

approach to valuation in a case such as this requires some real world judgments as to

what is likely to happen (such as a judgment as to the correct weighted average cost of

capital, which is a very important element in a DCF calculation), rather than a range

to which other ranges are applied in a series of random calculations to come up with

some mechanistic probability calculation. I find the former approach much more

helpful and much more relevant.

46. I confess that I also have misgivings as to the ultimate soundness of the LEKapproach from the manner in which it and the supporting material was provided. The

Mezzanine Lenders first disclosed that LEK were advising them on 1st June 2009,

and their work at that time was said to support the Mezzanine Lenders view that the

value of the company breaks in the mezzanine debt. On 12th June they were asked

by the scheme companies solicitors for a copy of valuation material relied on.

Shortly thereafter the Senior Lenders solicitors proposed a discussion between LEK

and PwC. The Mezzanine Lenders responded on 21st June that they would let the

solicitors know when they believed the meeting to be appropriate. They never did

that. On 2nd July the scheme companies solicitors repeated their request for the

Mezzanine Lenders valuation material, and the request was repeated the next day inthe light of the fact that it had by then become apparent that the Mezzanine Lenders


15/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

had received advice from LEK. The response was strange in the light of the clear date

of the report - the Mezzanine Lenders solicitors said that it would be provided on the

date which the court had prescribed for the provision of the Mezzanine Lenders

evidence (which was 10th July). It was provided with that evidence.

47. Having got the report, the companies solicitors immediately asked for details ofsupporting material so that the methodology could be understood. The report itselfmerely states bald conclusions, without detailing the assumptions underlying it. On

14th July the Mezzanine Lenders solicitors responded:

The LEK report is based on underlying data taken from

reports produced for your clients and other information

supplied by them. As it stands, the LEK report - and more

particularly the methodologies employed - is comprehensible.

That is a very unsatisfactory response. First, it was a very unhelpful response to a

perfectly reasonable request. The underlying assumptions are obviously needed if theworth of the report is to be tested. Anyone who really wished their valuation evidence

to be understood would have realised that and provided the material. Second (and

flowing from the first) the report itself might be regarded as comprehensible as a

matter of English, but it would not be fully comprehensible to a valuer in the sense in

which a valuer would wish to comprehend it. Again, I would have expected a

professional to have realised that. Third, it turns out that the first sentence is not

wholly accurate. The underlying data came not only from material emanating from

the scheme companies or their valuation reports; it also came from other sources.

And anyway, without identifying it, the remark, even if true, is unhelpful. The letter

went on to purport to deal with some of the specific questions raised, but not

adequately.

48. Eventually some more useful background material was provided when Mr Southernsfirst witness statement was served on or shortly after its date (24th July 2009).

However, even then it turns out that the form of the information is a little strange in

the circumstances. It is described by him as the Appendix to the LEK report of 1st

July. Yet the report itself does not purport to contain an Appendix. No document is

recorded in it as containing the material on which it is based. The document produced

is not an appendix in the sense of being part of the original document, either by

annexure or by cross-reference. It is actually in the form of prints of slides in a

Powerpoint presentation, although a coversheet has been put on the print (as what is

clearly an additional page) which describes it as an appendix and dates it as at 1stJuly. Its very form and content is that which is appropriate to Powerpoint slides and

not to a technical appendix to a technical valuation. Furthermore, there is a page of

Disclaimers (page 1 of the pack of slides), which constantly describes it as a

Presentation and its purpose is Presentation to the Mezzanine Syndicate dated 1st

July 2009. So its genesis does not seem to have been that of an appendix to the

report. That is not to say that it cannot contain the relevant information. It seems to

do so (or at least Mr Dicker did not complain that it did not). However, the whole

story of the emergence of the report, and then the Appendix, and the form that the

Appendix takes, do not always sit entirely comfortably with the idea that this is a

valuable exercise conducted as being the best way of ascertaining the intrinsic value

of the group and in which the Mezzanine Lenders had confidence.


16/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

49. All in all, therefore, I do not give the LEK valuation as much weight as I give theother exercises. As an exercise of assessing what a third party purchaser would pay it

is very unconvincing. One cannot assume that he would pay something in the high

probability range. Purchasers do not work like that. Subjective assessments are much

more weighty factors, and the scheme companies exercises tend to reflect that better.

The most that it does in the present case is to give pause for thought on this point: Arethe purchasers in fact getting too a good deal (too much unfair value) because in the

present market sales are unlikely to take place, and when economic conditions change

the same group will be perceived to be more valuable, and the purchasers will

ultimately reap the benefit of that? This is not quite the way the case is put, but I can

see that in some circumstances it might be. It is, I suppose, another analysis of the

intrinsic value which is said to differ from current market value.

50. Having paused for thought, I have come to the conclusion that this evidence is notgood enough to establish what the MCC seeks to establish in this case. I do not think

that it is a proper way of addressing that point. It is an attempt to play with the same

sort of assumptions that are used more conventionally in valuations such as the PwCvaluation, but in a more mechanistic way which avoids having to make real judgments

in an area in which judgments are very important. It does not, in my view,

demonstrate with sufficient clarity that market conditions are currently giving the

Senior Lenders an unfairly good deal. There are other ways of dealing with that sort

of point. PwCs approach on their DCF valuation builds in their alpha factor - a

discount to reflect the fact that a purchaser will pay less in the present market because

of economic uncertainties. One can take that factor out again if one wants, and if one

does then one still gets a figure which is significantly less than the value of the Senior

Debt (as was demonstrated at the hearing).

51. Does the exercise nevertheless demonstrate that there is a realistic chance that thevalue of the group is in excess of the value of the Senior Debt, which is one of the

ways in which Mr Chivers puts it? For these purposes, again I do not think that it

does. It is too technical an approach to engender much confidence. I do not consider

that I can conclude that, on a valuation basis, the Mezzanine Lenders are getting a raw

deal because there is a good or even reasonable case for saying that they are being

deprived of value. The evidence is not that strong.

52. I have considered this conclusion particularly carefully in the light of the manner inwhich the evidence has been presented. There was no cross-examination on the

valuation evidence, so I must approach a rejection of the evidence with particular

care. The absence of cross-examination has meant that my understanding(particularly of the Monte Carlo technique and the limits of its appropriateness) is

more limited than it would have been with the benefit of the sort of testing that comes

from cross-examination. However, I have to consider the evidence as it is presented

to me. The scheme companies have produced expert evidence which is

comprehensible and relates to a real pointhow much would a purchaser pay for the

group now? The MCC has chosen to counter it with a different type of evidence,

which does not address that evidence but which seems to carry out a much more

theoretical exercise. I do not consider that it is successful in displacing the

companies evidence (and indeed in some respects it does not seek to do so it seeks

to do something different), or in raising a sufficient possibility of there being some

unrealisable value in the group of which the Senior Lenders will be the unfair


17/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

beneficiaries if the restructuring goes ahead. This also applies to the two

confirmatory exercises carried out by LEK (identified above) which featured very

little in the MCCs case.

Breach of duty or other shortcomings on the part of the boards of the scheme

companies

53. I have phrased the heading to this section to encapsulate the various ways in whichMr Chivers sought to put his case. He did indeed at one stage put it as high as saying

that the boards were in breach of duty to the companies and their creditors, though at

others he seemed to be putting it somewhat lower in a sort of could and should have

done better by the Mezzanine Lenders and other creditors way, stopping short of a

breach of duty.

54. The first thing to note is the late stage at which the breach of duty allegation arose.The point was not made at all in the evidence of the MCC in this case. It was not

complained of in pre-trial correspondence either. The only reference to duties was areminder in correspondence that certain duties were said to be owed, but that was in a

different context. On 10th June 2009 the MCC wrote to (inter alia) the directors of

Bluebrook and the SSC stating that it had been suggested that the directors were

acting in accordance with the instructions of the Senior Co-ordination Committee

and pointing out that if that were right then the shadow directors would owe the same

duties as a de iure director, in the course of which they would owe duties to have

regard to the interests of all creditors. All directors were urged to have regard to those

duties. This was not a letter complaining about a breach of duty, even though the

MCC had known of the restructuring plans for some time. Nor was it really aimed at

the board directors as such. Its primary aim was the alleged shadow directors. So this

letter does not complain that the directors are not actually fulfilling their duties inagreeing to the scheme. Even more strikingly, the point was not really made in Mr

Chivers skeleton argument served shortly before the hearing. The closest it got was

the last sentence, which says that in looking after the interests of the companies and

their stakeholders the boards should be requiring the Senior Lenders to pay a price for

the significant benefits they got.

55. This is not just a forensic point devoid of practical consequences. There is a fairnesspoint, both in a general sense and in a way which has affected the conduct of the case.

So far as general fairness is concerned, it was a serious allegation to aim at the

directors, who were entitled to more notice of it, and a better formulation of it, than

they were given. Such allegations should not really be made on the hoof, and as amatter of analytical convenience, as they were in this case. But more significantly for

the purposes of this case, its late emergence meant that the opportunity to have a

proper evidential consideration of the point has been lost. It was not disputed that the

directors of an insolvent company have to pay proper regard to the interests of the

creditors. However, what that duty means in practice will be very fact-sensitive.

Here the allegation was (or became) that the discharge of that duty (or the duty to

stakeholders, as the letter referred to above put it) meant that the directors ought to

have bargained for something to be provided to the Mezzanine Lenders. The

companies were forced to deal with the point by looking for material scattered across

witness statements which were intended to deal with different points, and the directors

did not have the opportunity of putting in a clearly focused evidential rebuttal. This

was less than satisfactory, though in the end the position became clear enough. I shall


18/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

deal below with the extent to which the scheme companies did or did not have a

bargaining position, but for present purposes will concentrate on the question of who

should have been doing the bargaining.

56. As I have just observed, there was no evidence from the companies which wasfocussed on this point. However, such evidence as there is does not support the casethat the boards were under the duty alleged. No-one has suggested that those ranking

below the Mezzanine Lenders had any economic interest, and in any event I am told

that there were no other creditors of these holding and intermediate companies. That

means that a duty to have regard to the interests of the creditors other than the Senior

Lenders means a duty to act in that manner in relation to the Mezzanine Lenders.

However, the Mezzanine Lenders seem at all material times to have been fighting

their own corner, and in no way expected the directors to fight for them. They were a

separate negotiating party, trying to protect their own interests, and while that might

not of itself in every case absolve the directors from trying to take additional steps to

protect them, in facts such as the present it goes a very long way. Mr Russells first

witness statement gives a history of the development of the schemes, anddemonstrates that the companies negotiated with both the Senior Lenders and the

MCC. At paragraphs 76 to 79 he describes what he believes to be negotiations

between the SSC and the MCC to try to reach an accommodation. There is not the

faintest suggestion that the MCC was looking to the boards to join in and assist.

Those negotiations did not succeed. The boards had had valuation material which

suggested that the MCC did not have an economic interest, and negotiated the scheme

with the SSC. That material did not make it obvious that the directors should be

taking it upon themselves to negotiate an interest for a body of creditors who had not

managed themselves to negotiate an interest in direct negotiations. They did not

conduct those negotiations. I am not surprised; the directors were not obliged to do so

in those circumstances.

57. The position is even clearer when one considers the evidence from the MCC. Its firstwitness statement comes from Snr Rafael Jesus Calvo Basarn. He describes the

MCC as being appointed to coordinate the Mezzanine Lenders participation in the

restructuring of [the group]. The MCC is said to have continually highlighted that it

sought to find a consensual solution that fairly reflects the Mezzanine Lenders

economic interests, and that it remains committed to doing so. In other words, it is

the negotiating party. Other paragraphs describe direct dialogue between the SSC and

the MCC. In his first witness statement, Mr Douglas Evans, who has a lead

responsibility in the MCC, provides details of other dealings which the MCC has had,

or sought to have. No reference is made to an expectation that the boards of the

scheme companies ought to be doing more. Any complaints about a failure to agree,

or a failure to deal, are made against the SSC.

58. All this is entirely inconsistent with the idea that the boards should have beennegotiating as the MCC now suggests. There is no evidence that the directors were

ever asked to do so, or ever had authority to do so, or could have ever have done so

without running the serious risk of treading on the MCCs negotiating toes. On the

facts as they appear from the evidence the duty in respect of which the Mezzanine

Lenders are said to have been in breach cannot realistically have existed, or at least

not in any meaningful sense. Coupled with the valuation evidence, the board would

have been entitled to conclude (if they had thought about it) that if the Mezzanine


19/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

Lenders could not themselves achieve anything, and in the absence of a request to do

something, they (the boards) were not obliged to start negotiating something else. Of

course, there is no evidence that the boards did think in that way, or indeed what, if

anything, the board thought about this aspect of the case, but that is because of the

manner in which the point was raised at the hearing, and its timing. I cannot draw any

inferences or make any other findings adverse to the directors in the light of thosefactors.

59. Nor is it clear what the directors ought to have, or could have, achieved in thecircumstances in which they found themselves. It does not seem that they had any

bargaining position. Mr Chivers sought to construct one. He relied on the following

points which he said should have been considered and deployed as appropriate by the

board.

i) The situation was one in which enforcement was not in the interests of theSenior Lenders because it would have been destructive of value. What was

required was a consensual disposition on a going concern basis (as is proposedunder the schemes).

ii) The group had enough cash and cashflow to keep trading. It could do soprofitably and did not need the assistance of the Senior Lenders to do so (other

than their refraining from enforcement). The ability to generate cash did not

depend on the Senior Lenders.

iii) The cashflow evidence showed that it would be possible for the group to payfuture interest to the Senior Lenders, and even have some money for capital

expansion, though it would not be possible to pay the Mezzanine Lenders as

well. The board had discussed some sale and leaseback transactions to releasecash. This sort of option could be further considered to assist future trading.

iv) The Senior Lenders can be considered as having an asset with the enforcementvalue of the asset. However, obtaining the full value of the going concern

asset, in their own hands, requires the co-operation of the companies. It can be

delivered only on a consensual basis.

v) This gave the directors a bargaining position. They could, in the words of MrChivers, have threatened to carry on trading. The Senior Lenders could only

have stopped that by enforcement action, which would not have been in their

best interests. So the directors had some cards in their hands.

60. This seems to me to be somewhat unreal. The group was, on any footing, technicallyinsolvent. That does not of itself inevitably require any particular course of action,

but it is a starting point for considering the impropriety of continued trading. Some

difficulties had arisen in the trading companies - see above. The companies could not,

on any footing, keep down further debt as it arose. The directors realised that there

were problems, and set about addressing them by engaging in discussions with the

lenders. There were, as the directors recognised, events of default under the major

credit agreements. They had valuations, none of which suggested that the Mezzanine

Lenders had an economic interest in the group. To say that in those circumstances the

directors had some bargaining power when discussing with the Senior Lenders issomewhat unrealistic. The directors properly engaged the major creditors in


20/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

discussions. To start bargaining in those circumstances is odd. And for them to

threaten to carry on trading on those circumstances, when they had quite properly

recognised a problem about that, would arguably have been to threaten to engage in

wrongful trading. There was actually a risk of further deterioration in the position of

the trading subsidiaries. Furthermore, Mr Evans has acknowledged in his own

evidence for the Mezzanine Lenders that the group would remain in difficulties incomplying with its financial covenants and a capital restructuring was required. In

those circumstances to say that the board had a negotiating position in that it could

have threatened to carry on trading is unreal and inaccurate.

61. This is not to say that the board had no negotiating position at all. It did not have todo whatever the Senior Lenders wanted. But it was not in a position to bargain for

some additional return to other creditors if the Senior Lenders resisted that.

62. Mr Chivers sought to demonstrate, by reference to Mr Russells witness statements,that what the board was doing was giving effect to the wishes of the Senior Lenders.

That does not seem to me to be a fair reflection of the evidence. The passages reliedon by Mr Chivers show that there were initial discussions involving all the

stakeholders (including, for these purposes the Mezzanine Lenders), but when they

came to naught the directors then agreed the schemes with the Senior Lenders as

being the only people whom they, the directors, could see as having an economic

interest in the company. This does not amount to looking only to the interests of the

Senior Lenders in some culpable way. It is agreeing to a scheme which the Senior

Lenders were prepared to agree to, in the belief that the scheme could not affect the

interests of anyone else (because of the size of the debt and the value of the assets), in

circumstances where the Mezzanine Lenders (looking after their own interests) had

not been able to do a deal with the Senior Lenders, and in circumstances in which the

Senior Lenders were entitled to clear priority rights over the Mezzanine Lenders. Thecompanies agreement to the scheme was in substance acknowledging economic and

business realities.

63. In this context I need to bear in mind the extent to which the boards could be seen tobe acting independently. The board of Bluebrook (which can be considered to be the

material one for these purposes) comprises 7 directors. 5 of them (including two non-

executive directors) will be transferring to the new group once the restructuring is

completed. There is a bonus structure in place there which will give the directors

significant bonuses, including a bonus if interest arrears are recovered there. Their

independence might thought to be impeached, even though Mr Russell deposes to the

fact that the board has had independent professional advisers at all times. However,there are two directors who are not transferring and who will not have any

relationship with the new group. All board decisions at the Bluebrook level have

been unanimous, so those two directors can be taken to have approved the

restructuring. They are independent for these purposes, so the schemes have had

some independent scrutiny. It is true, as the MCC observes, that there was no

committee of independent directors set up to consider the schemes, but the two to

whom I have just referred can be taken to have brought an independent judgment to

bear. On the facts of this case that, in my view, is enough to deal with any questions

of lack of independence which might otherwise arise.


21/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

Other points said to go to unfairness

64. Mr Chivers pointed to other points which supported his allegation of unfairness orwhich he said indicated that the schemes should not be approved.

65.

He pointed to the 12m of senior debt being left behind in the existing group. He saidthat this amounted to a hurdle left in the way of the Mezzanine Lenders should a

liquidator think about bringing proceedings against one of the professionals based on

a sale at an undervalue. The first 12m would still go to the Senior Lenders, so the

liquidator would have to be satisfied that the claim was worth more than that before

he or she thought it was worth bringing proceedings. It would, and was intended to,

act as a disincentive.

66. The Senior Lenders deny that that is its purpose. It is said by them, plausibly (albeiton instructions, and not as a matter of evidence) that the 12m is left there just in case

there is some asset which, unforeseeably, comes in. It is there to enable the Senior

Lenders to pick it up - they would have been entitled to the benefit of it had it come inbefore the schemes. In the light of the overall picture I do not think that I should or

can find a sinister import in relation to this factor. In any event I do not understand

how the deterrence is said to work unfairly in the first place. The undervalue has to

exceed the amount paid by the Senior Lenders before the claim is worth thinking

about. The Senior Lenders will have paid 301m (treating the Senior Debt as being

313m). If the assets are worth, say, 320m, generating an undervalue of 19m, then

the first 12m goes to the Senior Lenders anyway, leaving 7m for the Mezzanine

Lenders. If the 12m had been released and had not been left behind, then the Senior

Lenders would have paid 313m. The claim is now worth 7m, which again goes to

the Mezzanine Lenders. In other words, a claim has to be worth something to the

Mezzanine Lenders before it is worth bringing, and that value to them is the samewhether or not the 12m is left outstanding. So that makes it look even less sinister.

67. Mr Chivers went on to point out that directors of an insolvent company do not oweduties to particular sections of the creditors only, and that a board of an insolvent

company cannot insist that the business of a company should survive as a going

concern - a dominant intention to preserve the business is not a legitimate

consideration. In support of these propositions he citedRe Pantone 485 Ltd[2002]BCLC 266 and Sydlow Pty Ltd v Melwren Pty Ltd(1994) 13 ACSR 144. The first of

those propositions is true, but is irrelevant on the facts of this case. The directors of

the scheme companies have not sought to act in the interests of one section of

creditors at the expense, or to the detriment, of the creditors as a whole. They haveentered into arrangements with the section of secured creditors with priority over

subordinated creditors who, on the facts as known to them, would not have any

interest in the assets because of their subordination. That is entirely different from the

situation where directors advance the cause of one creditor at the expense of other

creditors who thereby lose a benefit they would otherwise have. The second

proposition is also plainly true. Where a company is insolvent, then a consideration

of whether or not to try to preserve the business as a going concern or not must be

guided by what is in the interests of the creditors and not by reference to some

unconsidered dominant intention to do so, or some dominant consideration to do so in

the interests of some third party without an adequate claim. In Sydlow there was afinding that the directors had sought to preserve a business not in the interests of the

company, but in the interests of a third party whose success they wished to promote.


22/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

That caused detriment to the company and its general body of creditors. Again, that is

not a proper analysis of the facts surrounding the present schemes. The directors were

not promoting the continuation of the group business as a going concern in the

interests of the Senior Lenders and at the expense of the Mezzanine Lenders. They

were assisting in a disposal on a going concern basis in the interests of the company,

because it procured a greater level of discharge of debt than would be the case on abreak up or insolvency disposition, in favour of someone who was, in effect, the sole

beneficial owner of the assets anyway (because of the security and subordination

position) and not at the expense of the Mezzanine Lenders at all (because of the

valuations and the absence of an economic interest in the asset).

68. Accordingly Mr Chivers follow-up submission fails too. He sought to deploy the principles that he got from those two cases to attack what the explanatory

memorandum described as the objectives of the restructuring - to create a new

corporate structure for the business with an improved balance sheet, and to avoid the

prospect of having to put some group companies into administration or liquidation

which, if had occurred, would lead to less recovery for the Senior Lenders than would be the case under the schemes. Since, on the figures (and in particular on the

valuation figures which the companies had, unchallenged at the time by any rival

valuation from the Mezzanine Lenders) and on the priority arrangements, the Senior

Lenders were the only persons interested in the assets, the objectives (shared by the

Senior Lenders) were not impeachable on that basis.

69. Mr Chivers went on to seek to draw some applicable principles from Re GreenhavenMotors Ltd [1999] BCC 463. He relied on it as demonstrating what the court does

when a compromise is before it and it does not produce a benefit for the creditors. In

that case the court was asked to approve a compromise entered into by a liquidator.

The company had no assets. It sought to compromise a possession action broughtagainst it, and a counterclaim against the claimant, by agreeing, amongst other things,

to give up the counterclaim. The Court of Appeal said that compromise should not be

sanctioned. At the end of his judgment Chadwick LJ said:

The question for the court is whether a compromise which

provides no discernible benefits, but which just mightdo someharm to the creditors and contributories, should be sanctioned. I

am satisfied that that question should be answered in the

negative.

70. Mr Chivers submitted that this case established that when considering the situationwhere a corporate entity is releasing its claims, in order to assess the benefit to the

company you have to look at the benefit to persons other than the creditor who is

compromising with the company. You cannot, he says, merely treat the release of a

debt against the company as amounting to corporate benefit; there had to be some

valuable consideration, and the court had to be satisfied that the value of the asset

being transferred is at least equal to the value of the asset being received. On the

basis of the evidence, the court could not be satisfied that the assets being transferred

were equal to the value of the outstanding Senior Debt.

71. It was not wholly clear to me whether Mr Chivers was relying on this submission insupport of his proposition that the schemes could not amount to a compromisewithin the meaning of the section (as to which see the next section of this judgment),


23/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

or whether this was a point going to discretion. So far as it was the former, it does not

assist him. The case did not decide that the transaction in that case was not a

compromise; it held that it was not a compromise which the court should sanction. So

far as it raises factors going to discretion, it is operating in a different environment.

The function of a court asked to sanction a compromise by a liquidator involves

considering whether the interests of those interested in the assets of the company inliquidation are best served by letting the company enter into the compromise, or by

not letting it enter into the compromise. This is not the same exercise as a court

conducts when considering a scheme of arrangement under section 899. The latter

exercise has been set out in a number of well-known authorities, and while the

exercise may in some cases share some elements with the liquidation compromise

cases, the emphasis and overall issue is different see for example the formulation by

David Richards J in Re Telewest Communications plc (No 2) [2005] 1 BCLC 772 at

para 20. One only has to read that formulation, and compare it with Chadwick LJs

summary in Greenhaven, to see why that is the case.

Whether this is a compromise or arrangement

72. Section 899 of the Companies Act 2006 provides that parties may agree acompromise or arrangement and the court may sanction the compromise or

arrangement. Mr Chivers submitted that the schemes did not fall within that

wording. His first point was that a compromise or arrangement involves an element

of reciprocity of benefit, and that in a situation in which one party gives up everything

and gets nothing in return then there is no compromise or arrangement. In support of

this proposition he relied on In re NFU Development Trust[1972] 1 WLR 1548. In

that case the scheme provided that all existing members of a company apart from 5

gave up all rights in respect of their shares, and that on a winding up all surplus assets

were to be paid to another body or company having the same objects, or to charity.Brightman J cited In re Alabama, New Orleans Texas and Pacific Junction Railway[1891] 1 Ch 313 and went on to say:

The word compromise implies some element of

accommodation on each side. It is not apt to describe a total

surrender. A claimant who abandons his claim is not

compromising it. Similarly, I think that the word arrangement

in this section implies some element of give and take.

Confiscation is not my idea of an arrangement. A member

whose rights are expropriated without any compensating

advantage is not, in my view, having his rights rearranged in anylegitimate sense of that expression.

73. Mr Chivers sought to apply that to the present case.74. It does not seem to me that it can be applicable. That was a case in which the

members were giving up theirrights and getting nothing back in return. If the right

(if that is what it was) to have surplus assets transferred to another company might be

regarded as to some extent a right, Brightman J did not regard it as being one for these

purposes. The present schemes are nothing like that. The schemes release the scheme

claims, but it is part of an arrangement under which those claims are substituted by

new claims against the new group, and the assets of the existing group are to betransferred. True it is that the scheme companies do not themselves promise to do


24/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

much under the scheme, but the schemes are part of a wider arrangement. The

situation is really nothing like that in the NFU case, where there was absolutelynothing passing back to the members. It is right to describe the present schemes as

being certainly arrangements, and probably compromises as well. The present case is

not a complete surrender.

75. Accordingly, the schemes within this case are, as a matter of jurisdiction,compromises or arrangements within section 89.

Other matters relied on by the companies and the SSC

76. So far I have concentrated on the case of the MCC for saying that schemes are unfairto the Mezzanine Lenders. The scheme companies and the SSC had their own points

which they relied on in support of their case that the schemes worked no unfairness

towards the Mezzanine Lenders. In many respects they were counterparts to, or

answers to, points made by the MCC, but I should deal with some of them.

77. Their combined cases relied on the following:i) The scheme companies required restructuring. That was accepted by everyone,

including the MCC, apparently.

ii) The companies have obtained valuations of the business as a going concern, orhave conducted an exercise to see how much a going concern sale might

realise (the Rothschild exercise). Those valuations and exercises pointed to

valuations which were much less than the value of the Senior Debt. They were

proper exercises, not conducted on a break-up or even a fire-sale exercise

(though the King Sturge exercise came up with a figure for a quick sale as analternative figure) and their results were consistent in that the best figures fell

well short of the Senior Debt.

iii) There were discussions which involved the MCC, and the SSC had beenprepared to allow the Mezzanine Lenders some participation in the new group

on a nuisance basis, but that has been withdrawn.

iv) There was no obligation, given the valuations, to consider a scheme involvingthe Mezzanine Lenders, who had no economic interest in the companies.

v) By the time the schemes were put in place, the Senior Lenders had decided to propound schemes which conferred no benefit on the Mezzanine Lenders.

They were entitled to do that. The subordination arrangements left the Senior

Lenders in a position in which they could enforce their rights, and procure the

release of any interests of the Mezzanine Lenders which would technically

stand in their way. What the restructuring does is in essence to give effect to

something which the Mezzanine Lenders are not in a position to resist.

vi) The Senior Lenders could bring about an auction of the companies now, andthemselves bid up to the value of the senior debt without causing any

additional prejudice to themselves or the Mezzanine Lenders. Such a state of

affairs would have the same effect as the overall arrangements of which theschemes form part.


25/26

MR JUSTICE MANN

Approved Judgment

Bluebrook

vii) The Mezzanine Lenders have a safeguard in the form of clause 12 of theIntercreditor Agreement. If they really thought that the debts were being sold

at an undervalue, or at a price which gave the Senior Lenders a good prospect

of a benefit in the future which was unfair to the Mezzanine Lenders (because

it deprived them of that benefit) then they could buy out the Senior Lenders

and do the restructuring themselves, with the benefits which they claim to flowfrom the restructuring to the Senior Lenders. They have chosen not to do so.

They do not seem to want to run the risk.

viii) The Senior Lenders were not just helping themselves to assets with a value inexcess of their debt. They were not fully enforcing at this stage (in the sense

of having the assets sold and applied to reduce their debt). They are leaving

debt outstanding and turning debt in to equity, so as to allow trading to

continue. They were taking a risk, which was a genuine risk in that it might

not work and which might leave them worse off at the end of the day. The

affairs of the new group might not flourish, and they will bear the risk of that.

ix) Absent these schemes, enforcement is a very serious possibility, if not aninevitability. It is no answer to say, as Mr Evans doe

case1 - lek vs pwc

Documents