June.28.2016
On 12 February 2016 Snowden J handed down his judgment in Indah Kiat International Finance Company B.V. [2016] EWHC 246 (Ch). Indah Kiat International Finance Company B.V. ("Indah Kiat"), part of the global Asia Pulp & Paper Group (one of the world's largest pulp and paper manufacturers), applied for an order convening a meeting of scheme creditors to consider and, if thought fit, approve a proposed scheme of arrangement (the "Scheme") under Part 26 of the Companies Act 2006. One creditor, APPIO, opposed the Scheme on various grounds and in this hearing sought an adjournment on the basis that insufficient notice was given to the creditors of the convening hearing.
The Indah Kiat judgment neatly follows a similar judgment of Snowden J in Van Gansewinkel Groep BV [2015] EWCG 2151 (Ch) only a few months earlier. In this case Snowden J took the opportunity to review the current law on jurisdiction relating to schemes of arrangement, and, arguably, to raise the jurisdictional hurdle. He noted that in recent years, schemes of arrangement have been increasingly used to restructure the financial obligations of overseas companies that do not have their centre of main interest or an establishment or any significant assets in England, and stated that companies seeking approval of a scheme would be well advised "to ensure that greater detail is provided, both in the explanatory statement and in the evidence before the court". Additionally, and more importantly for Indah Kiat, he commented on the judgment in re Telewest Communications plc (No 2) [2005] 1 BCLC 772 that the court will not generally sanction a scheme if it finds a "blot" in the scheme such that the scheme will not have the effect that the company and creditors intend. This is key in the underlying message of Snowden J's Indah Kiat judgment.
Whilst schemes of arrangement have become increasingly popular to compromise creditors' claims in a pragmatic manner which may not be available in the jurisdiction of incorporation of the relevant debtor, the judgments in Van Gansewinkel and, more specifically, in Indah Kiat, make it clear that the English courts will not compromise the integrity of this highly effective restructuring tool where the parties invoking the court's jurisdiction act other than with the "utmost candour".
The Scheme intended to release and discharge Indah Kiat and its parent company from their liabilities pursuant to two series of notes issued in 1994, which were due in 2002 and 2006 and carried interest at rates of 11.875% and 12.5%. The combined face value of the notes was US$350 million. In addition the Scheme intended to release Indah Kiat and its parent from liability pursuant to judgments entered in the US in favour of various plaintiffs in 2004 and 2006.
In return, the Scheme proposed the issue of new notes together with a cash payment of about 13.5% of the face value of the existing notes. The new notes would be unsecured and carry interest rates of 3 month LIBOR +1% to +3% or a fixed rate of 2%, and would be payable in 2020 and 2036. Alternatively, the Scheme offered creditors cash in the sum of 25% of face value of the existing notices, subject to a cap of US$8 million.
Snowden J found without much difficulty that the notice given to the creditors was insufficient. In many previous schemes, giving 14 days' notice of a directions hearing has been held to be sufficient. However, this is determined on a case-by-case basis, taking into account the circumstances of each case and the complexity of the proposed scheme. Indah Kiat had been in significant financial difficulty for around 15 years and therefore, absent any particular urgency, it was not sufficient notice to allow 14 days for the practice statement letter to pass through the clearing systems to reach the creditors. It was brought to the court's attention that at least one creditor would not have received the notice until one day before the hearing.
Having come to his decision regarding notice, Snowden J also made a number of obiter observations and comments, stating that even if he had not been persuaded that the notice was inadequate, he would not have made an order convening the meeting of scheme creditors.
In the Indah Kiat judgment Snowden J cited his Van Gansewinkel judgment in drawing attention to the requirement to provide detail of alternatives to a proposed scheme in the explanatory statement and evidence before the court. He noted that a director of Indah Kiat had proposed two alternatives to the Scheme (a consensual arrangement and formal insolvency proceedings) and had dismissed both without presenting a full analysis. In particular, the evidence presented by Indah Kiat did not contain an analysis of the likelihood of formal insolvency proceedings being commenced in the event that the Scheme did not advance.
The draft explanatory statement also failed to disclose certain releases of liability which would benefit current and former directors of Indah Kiat.
Snowden J noted the jurisdictional requirements, including a significant nod towards his judgment in Van Gansewinkel, and concluded that it is "at least reasonably arguable" that the English court could sanction the Scheme if Indah Kiat could satisfy the court that the Scheme would achieve its purpose in the United States (the notes subject to the Scheme were governed by New York law). However, he decided that any submissions regarding jurisdiction would be better dealt with at a future sanction hearing.
A company proposing a scheme is required to make full and frank disclosure of all material facts that may be relevant, even if the scheme is unopposed. This gives an opportunity at the convening hearing to raise other issues which "go to jurisdiction or which would unquestionably lead to the court declining to sanction the scheme".
Snowden J left no room for doubt that he was unimpressed by the evidence of Indah Kiat, stating that the evidence and the draft explanatory statement were "materially deficient". In particular, he singled out the two witness statements of Mr Smotlak, the sole director and employee of Indah Kiat. Mr Smotlak had no personal knowledge of the relevant events and his evidence deferred to knowledge portrayed to him by "colleagues and professional advisers" without shedding any further light on who these may be. Unsurprisingly, Snowden J found that this did not comply with the requirements of CPR PD 32[1] and noted that this was not a mere procedural defect, but it went to the heart of the issues surrounding the Scheme.
It is clear from the judgment that Snowden J was highly unconvinced by the integrity of the witness evidence and was concerned by what it may have been attempting to hide, including the identity of the illusive supporting creditor.
The practice statement letter produced by Indah Kiat stated that Capital Unity Pte. Ltd ("CUP"), holder of the beneficial interest in 28.6% of the notes, was in strong support of the Scheme. Further, the court was informed that "productive negotiations" had taken place between Indah Kiat and CUP. Snowden J noted that this was highly unlikely given that CUP was only incorporated one week before that statement was made, and that such negotiations must have taken place with someone else, meaning that CUP was most likely acting as nominee for, or under the control of, another unnamed interested party.
The main point of contention was whether CUP (or the party for whom it acts) was affiliated with the APP Group. On this point Snowden J admits to being swayed by the similar facts of a case in the Bermudan courts in 2003 (Fidelity Advisor Series VIII v APP China Group Ltd [2007] BDA LR 35, the "Bermuda Judgment") in which the court found that Mr Widjaja, the patriarch of the APP Group, was found to have perjured the court. In this case a company in the APP Group sought the sanction of a proposed scheme of arrangement and Mr Widjaja gave evidence that there was no connection between the controlling shareholders of the APP Group and the creditors who supported the proposed scheme. Three years later it was found that the supporting creditors were in fact employees of a company owned by the Widjaja family.
Snowden J references a reported case in the High Court of Singapore (Multinational Investment Bank (Germany) AG & Another v Asia Pulp & Paper Company Ltd [2002] SGHC 257, the "Singapore Judgment") in which a Multinational Investment Bank (Germany), a creditor of APP, sought enforcement of an agreed payment plan. The Singapore Judgment sets out a number of misdemeanours on the part of the APP Group, including transactions which were clearly disadvantageous to creditors during insolvency, unexplained discontinuation of judgments won against debtors, rumours that the Widjaja family purchased its own rupia-denominated bonds through third parties as a means of extracting cash, and the hiding of funds offshore, beyond the reach of creditors. The Singapore Judgment states that "the questionable nature of the 5 BVI companies and their apparent connection with the Widjaja family cried out for explanations which were not at all forthcoming".
In addition to the Singapore Judgment in 2002 and the Bermuda Judgment in 2003, a Bloomberg report dated 13 August 2001[2] sets out a number of causes for concern on the part of creditors in relation to the operations of the APP Group. The report states that at the time of writing, around $3 billion to $4 billion was "unaccounted for", following a "bewildering variety of debt offerings issued by offshore subsidiaries". Further, it explained that in July 2001 it was announced that $762 million was being held in a Widjaja family-controlled bank in the Cook Islands, and would not be retrievable for distribution amongst creditors.
Snowden J's judgments in both Indah Kiat and Van Gansewinkel highlighted the fact that he felt it appropriate to look at the circumstances behind a proposed scheme and evaluate whether it would achieve the aims of the company and the creditors. As stated above, he was looking out for a "blot" on the Scheme, to avoid a waste of time and money that would occur if scheme meetings were convened and held on an incorrect basis, or where there is some other fundamental roadblock. Presumably cognisant of the background of the APP Group and the Widjaja family, Snowden J took advantage of the wide discretion available to the court in the first hearing, and he chose to adjourn the hearing and make clear that he did not support the convening of a scheme meeting based on the evidence before the court.
The wide discretion and common-sense approach exercised by Snowden J are key to ensuring that the English scheme of arrangement maintains legitimacy as a means of cross-border restructuring. Any less robust system could be seen as a rubber-stamping exercise, in which the court exercises little or no discretion and this could compromise the ability of distressed companies to obtain recognition in other jurisdictions, including chapter 15 recognition under the US Bankruptcy Code. Judges such as Snowden J must remain mindful of their role as guardians of the English law scheme of arrangement and continue to protect the integrity of the English system.
[1] PD 32 (Evidence) sets out the requirements for preparing and filing witness evidence, including the format, body and statement of truth.
[2] Asia's Worst Deal – Bloomberg (August 13, 2001).