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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sunbird Business Services Ltd, Re [2020] EWHC 3459 (Ch) (16 December 2020) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2020/3459.html Cite as: [2020] EWHC 3459 (Ch), [2021] Bus LR 401, [2020] WLR(D) 688 |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Rolls Building, Fetter Lane, London, EC4A 1NL |
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B e f o r e :
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IN THE MATTER OF SUNBIRD BUSINESS SERVICES LIMITED | ||
AND IN THE MATTER OF PART 26 OF THE COMPANIES ACT 2006 |
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Mr. Rupinder Bains (a creditor) appeared in person
Hearing dates: 1 and 2 December 2020
Further written submissions 7 December 2020
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Crown Copyright ©
MR JUSTICE SNOWDEN:
Background and overview
The Scheme and Scheme Document in outline
"In preparing our report our prime source of information has been management information provided by the Company and responses to queries we have raised. We have not generally sought to establish the reliability of information provided to us although we have sought to confirm certain information by reference to Companies House. Our work does not constitute an audit and we will not issue an opinion relating to the financial statements, tax or internal control systems of the Company."
"The [Insolvency Analysis and Valuation Review Report] was prepared for the information and benefit of the Board of [the Company], [the Company] and the Court (for the purpose of considering whether to sanction the Scheme) and JCK does not accept responsibility to any other party who may be shown a copy of the documents including Scheme Creditors."
Written objections to the Scheme and the Scheme Meeting
"[The Opposing Creditors] expect your client to bring this letter to the Court's attention and address the points raised therein at the sanction hearing listed for 1 December 2020; your client is doubtless aware of its duties to the Court in that regard."
In addition, however, Shoosmiths indicated that their clients would be available at the hearing "to answer any questions the Court may have". In the event, Mr. Bains appeared in person.
The Sanction Hearing
"142. I have experienced a growing tendency for creditors to purport to reserve their position by floating or trailing generic points without proper explanation, elaboration or evidential base, often with the expressed expectation of returning to their points (or some of them) in the future (usually the Sanction stage). It seems to me that the Covington Letter is an example of this tendency.
143. This developing tendency places a growing burden, not only on the Company (which has an obligation to do its best to address and deal candidly with points of substance going to the court's jurisdiction or likely to affect its proper exercise), but also on the court, which is obliged to sift through disparate and sometimes undeveloped points without proper assistance.
144. Furthermore, even in the case of creditors with comfortably the financial wherewithal to fund appropriate representation (such as the Covington-Represented Creditors in this case which include some of the largest corporations in the world), this tendency is accompanied by an apparent reluctance or disinclination to arrange to be represented at the Convening Hearing. That tends to increase, not decrease, the burden on the court, which will often (almost invariably, in my own experience) be assisted by properly focused oral argument.
145. In case this reluctance or disinclination is the result of concerns that attendance may trigger some exposure to costs, I would wish to make clear my understanding (and certainly my own usual practice) that, unless the objections are wholly improper or irrelevant, obviously collaterally motivated, or sprung on the scheme company without affording a proper opportunity for their discussion, there is very little likelihood of any adverse order for costs at that stage; and indeed there will usually be a real prospect of the relevant creditor recovering its reasonable costs of helpful and focused representation, fairly outlined in good time before the convening hearing to enable their proper consideration, on the class issues raised."
The Law
"20. The classic formulation of the principles which guide the court in considering whether to sanction a scheme was set out by Plowman J in Re National Bank Ltd [1966] 1 WLR 819 by reference to a passage in Buckley on the Companies Acts, which has been approved and applied by the courts on many subsequent occasions:
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme."
21. This formulation in particular recognises and balances two important factors. First, in deciding to sanction a scheme under section 425, which has the effect of binding members or creditors who have voted against the scheme or abstained as well as those who voted in its favour, the court must be satisfied that it is a fair scheme. It must be a scheme that "an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve". That test also makes clear that the scheme proposed need not be the only fair scheme or even, in the court's view, the best scheme. Necessarily there may be reasonable differences of view on these issues.
22. The second factor recognised by the above-cited passage is that in commercial matters members or creditors are much better judges of their own interests than the courts. Subject to the qualifications set out in the second paragraph, the court "will be slow to differ from the meeting"."
"Now, it?is quite obvious from the language of the Act and from the mode in which it has been interpreted, that the Court does not simply register the resolution come to by the creditors or the shareholders, as the case may be. If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be. I do not say it is conclusive, because there might be some blot in a scheme which had passed that had been unobserved and which was pointed out later.
While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted, and have considered the matter from a proper point of view, that is, with a view to the interests of the class to which they belong and are empowered to bind, the Court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the Court to shew that there has been some material oversight or miscarriage."
"The statement must
(a) explain the effect of the compromise or arrangement, and
(b) in particular, state
(i) any material interests of the directors of the company (whether as directors or as members or as creditors of the company or otherwise), and
(ii) the effect on those interests of the compromise or arrangement, in so far as it is different from the effect on the like interests of other persons."
"14. Explanatory statements should be in a form and style appropriate to the circumstances of the case, including the nature of the member and/or creditor constituency, and should be as concise as the circumstances admit. In addition to complying with the provisions of section 897 the commercial impact of the scheme must be explained and members and/or creditors must be provided with such information as is reasonably necessary to enable them to make an informed decision as to whether or not the scheme is in their interests, and on how to vote on the scheme. Where a document is incorporated into the explanatory statement by reference, readers should be directed to the material part(s) of the document."
The Objections to the information in the Scheme Document
Disclosure of interests
Inaccuracies in the Financial Information and Insolvency Analysis
"The Company had explained the background of the TFA Kenya loan during the insolvency analysis carried out by JCK, however, I accept that the language in the Insolvency Analysis is not a satisfactory description of the position."
"The Company balance sheet includes creditor balances relating to trade receivables ($42k) and other current assets ($273k). We have been informed that these balances relate to accounting anomalies and do not reflect either an asset or liability of the Company."
"Prepayments include some amounts prepaid in respect of, for example, medical and PI insurance which we would not expect to be refundable. We [JCK] have been informed that the greater part of this balance relates to entries which remain unknown having not been identified as part of or since the audit of the 31 July 2018 financial statements and, therefore, we have assumed that there will [not] be any realisation."
"The Company's balance sheet as at 31 July 2020 shows intangible assets of $5,952m. This comprises acquired goodwill. The acquisition included the trading name and customer agreements We have been informed that there is no formal registration of the Company trading style. We do not consider that there will be any significant value in these intangible assets."
Matters of Opinion
"The inference made that certain subsidiaries are in fact currently profitable is incorrect and substantially out of date. The July 2020 trading numbers of the Company are clearly outlined in paragraph 5.3.3 of the Scheme Document. During the period that Mr Bains was chief financial officer of the Company, the central office of the Group was moved to Kenya, leaving the Kenyan subsidiary loss-making. The Group lost a major contract in Tanzania that left the Tanzanian subsidiary of the Company loss-making. Both of these circumstances were previously communicated to the Opposing Creditors."
"There is a remote possibility that a buyer could be found for the shares in one of the trading subsidiaries. The motivation for purchasing the shares would be to enable the continuation of the subsidiary's lease and rental agreement which would otherwise terminate on insolvency. The purchaser would, however, need to provide significant working capital in order to fund ongoing trading and would have to meet the outstanding liabilities, including the inter-company liabilities, and, as a result, the consideration is likely to be nominal. The Company would not directly benefit from such a share sale because the trading subsidiary shares are owed by Sunbird Africa, however, the Company would be in a position to call in its inter-company debts. It is difficult to envisage why a purchaser would wish to take on the burden of indebted, loss making entities without an agreement in respect of writing off of inter-company loans which would be unlikely if Sunbird South Africa were in an insolvency procedure."
The Directors' Valuation of the Company and the Valuation Review Report
The viability of the Company
Accuracy of the information
"JCK in its Valuation Review Report viewed that the Scenario B assumptions, on balance, provided a lower risk view of forecast earnings and cash flow while Scenario A could be regarded as higher risk."
"As set out above at paragraph 8.2 of this Part 1, in JCK's view, if Scenario B is regarded as the more likely forecast scenario, then the minimum high priority funding requirement of [the Company] would be $2,700,000 immediately following the Scheme."
The reference to paragraph 8.2 was to a sentence that simply stated,
"Following the review by JCK, the Board considered the [Company/group] required an urgent minimum cash requirement of US$2,700,000."
Would the Scheme serve any purpose?
"8.10 The proceeds of the Rights Issue will be used by [the Company] to fund the [group] in order to: (i) pay down circa US$1,500,000 of certain aged payables of the [group] including amounts of overdue rent payable to landlords; (ii) fund circa US $300,000 of working capital requirements of the [group] including the funding of cash losses until the business turns cash positive; (iii) discharge circa US$300,000 of liabilities of [the group]; (iv) US$250,000 on capital expenditure in existing workspace centres on the basis that the business starts to meet performance targets set by the Board; and (v) a provision of paying US$500,000 of costs as described below.
8.13 Any outstanding costs of the Scheme, the Rights Issue and the restructuring will be paid out of the proceeds of the Rights Issue. The total cost of the Scheme and the Previous Scheme, Rights Issue and restructuring, including professional fees and legal fees of Opposing Scheme Creditors, is estimated to be approximately US$500,000. The Board will work with the advisers to agree a suitable payment plan. Given the costs presented by the Opposing Scheme Creditors for the Previous Scheme and the likelihood of further costs for this Scheme, it is likely that the costs of implementing the Scheme will increase."
"Trading update
4.7 Despite the significant distraction of the Scheme and restructure, the Company has delivered good growth in private offices sales of approximately 7% quarter on quarter, (approximately US$21,000 per month) and has a number of sales closing and in-process amounting to an incremental amount of US$40,000 per month. Incrementally, the Company has over $73,000 per month in available space that can be sold before any capital expenditure is required. In addition, the Company has moved clients to higher yielding space and carried out further cost rationalisation to reduce its overheads. The ability of the Company to win new clients and manage costs gives management confidence the Group will achieve breakeven in the coming months. The completion of the Scheme and Rights Issue will free up significant management time for the Group to work towards its profit targets.
Use of proceeds of the Rights Issue
4.8 As set out in the Scheme Document, the proceeds of the Rights Issue will be used by the Company to fund the Group for the following purposes: (i) to pay down circa US$1,500,000 of certain aged payables of the Group including amounts of overdue rent payable to landlords; (ii) to fund circa US $300,000 of working capital requirements of the Group including the funding of cash losses until the business turns cash positive; (iii) to discharge circa US$300,000 of liabilities of the Group; (iv) US$250,000 on capital expenditure in existing workspace centres on the basis that the business starts to meet performance targets set by the Board; and (v) a provision of paying US$750,000 of costs. The Company previously made provisions for US$500,000 of costs. It was noted in the Scheme Document that the costs of the Scheme were likely to increase. The Company has provided for such increase in costs by (i) having headroom after deducting the amounts set out in paragraph 8.10 of Part 1 of the Scheme Document from the total amount of the Rights Issue proceeds; and (ii) having elements of discretionary spend in the allocations of the Rights Issue proceeds which can be managed by the Company to ensure that it can meet the additional costs of the Scheme."
"The court will not generally make any order which has no substantial effect and, before the court will sanction a scheme, it will need to be satisfied that the scheme will achieve its purpose."
General
Conclusion