Vol 1 (2004) - Issue 5

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Telewest Scheme of Arrangement

The recent court hearings to obtain sanction for the Telewest Communications plc scheme of arrangement have thrown some light on the approach which will be adopted by the courts to the issue of identification of classes and general considerations of fairness.
The Telewest scheme of arrangement involved a debt for equity restructuring. The debt in question principally comprised bonds, of which some eighty per cent were denominated in US dollars and the remaining twenty per cent in sterling. The Telewest scheme was opposed by a group of bondholders whose bonds were denominated in sterling. Their particular complaint arose as a result of the exchange rate proposed under the scheme.
In order to enable the new equity to be distributed, it was necessary for the claims of the bondholders to be denominated in a common currency. Rather than using a spot rate on a particular date for converting the value of claims, the scheme proposed using an average exchange rate over a period from the date when there was first default under the bonds until the latest practical date before distributing the explanatory statement (so that the rate to be used would be known to the creditors). The commercial reasons for using an average exchange rate rather than the spot rate on a particular date included the prevention of entitlements to the new equity being susceptible to short-term exchange rate fluctuations.
The opposing sterling bondholders claimed that the effect of using the average exchange rate was that the value of the claims of sterling bondholders was reduced by some five per cent, as compared with the US dollar bondholders, as a result of movements in the exchange rates after the proposed use of the average rate had been made public. In short, they claimed that as a result of the average exchange rate, they would receive unequal treatment as compared with the US dollar bondholders who would in effect receive a corresponding windfall.
There were two court hearings. The first, held in April 2004, was the initial hearing for directions at which the procedure set out in the Practice Statement [2002] 1 WLR 1345 was followed. That procedure was put in place following the decision of the Court of Appeal in Re Hawk Insurance [2001] 2 BCLC 480 to enable, so far as possible, the determination of all issues in relation to the composition of classes of creditors for the purposes of a scheme to take place at the hearing of the application to convene meetings. Previously, if issues were raised as to the composition of classes they could only be dealt with at the hearing for the sanction of the scheme, and if it transpired that the classes had been incorrectly identified, a good deal of time and expense would have been wasted in convening and holding the meetings.

The class issue

At the first hearing, the opposing sterling bondholders argued that the court should not give leave to convene the meetings unless the terms of the scheme were altered so as to provide for conversion at the spot rate on the date for valuing claims under the scheme (‘the merits issue’). Alternatively, they argued that the sterling and dollar bondholders fell into two separate classes and that separate meetings of each class should be called (‘the class issue’).
As regards the merits issue, the judge (Mr Justice David Richards) emphasized that the first hearing was not a hearing to consider the merits and fairness of the scheme. The matters for consideration at that hearing concerned the jurisdiction of the court to sanction the scheme if it were to proceed, i.e. principally to decide the question of the composition of the classes. Issues arising on the merits including fairness would only arise for consideration at the later hearing to sanction the scheme. However, as described below, there remained a question as to the extent to which the general merits and fairness of a scheme would be considered at the sanction stage.
As regards the class issue, the judge reaffirmed the distinction between rights and interests and stressed that differences in rights, not interests, are relevant to the composition of classes. This followed from the classic test laid down by Bowen LJ in Sovereign Life Assurance v Dodd [1892] 2 QB 573 at 583 that the meaning of class ‘must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’. But as subsequent decisions have shown, this test is not always easy to apply in practice.