Neutral Citation Number: [2014] EWHC 1096 (Ch)
Case No: 645 AND 647 OF 2014
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL

Date: 10/04/2014

Before :

MR JUSTICE BIRSS
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Between:

IN THE  MATTERS OF STEMCOR (S.E.A.) PTE LIMITED AND STEMCOR TRADE FINANCE LIMITED

AND IN THE MATTER OF THE COMPANIES ACT 2006

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Antony Zacaroli QC and Tom Smith (instructed by Freshfields Bruckhaus Deringer LLP) for the Companies
David Allison (instructed by Allen & Overy LLP) for the Co-ordinating Committee
Mr Swinnerton of Swinnerton Moore LLP for the Anadolubank Nederland N.V.

Hearing date: 26th February 2014
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Judgment
Mr Justice Birss : 

1.	The Stemcor Group carries on business as one of the world’s largest independent traders of steel and raw material for the steel industry.  The group has four principal activities: upstream mining and processing; trading and distribution; stockholding; and financial products.  The parent of this group is Stemcor Holdings Limited (SHL).
2.	This is an application for orders under s899 of the Companies Act 2006 to sanction schemes of arrangement relating to two companies in the group.  They can be referred to as STFL and SEA.  STFL manages the group’s structured finance and offset operations and SEA is the group’s Asian trading and distribution business and trades steel and related raw materials, primarily in the Far East. 
3.	At present the existing financial arrangements of the group include the following: 
i)	A US$1 billion 2011 European revolving credit facility with STFL as a borrower and BNP Bank Paribas (Suisse) S.A. as facility agent;
ii)	A second, US$850 million, 2012 European revolving credit facility essentially with STFL as a borrower and BNP Paribas (Suisse) S.A. as facility agent;
iii)	A US$20 million European loan facility between Nedbank as lender and STFL as a borrower;
iv)	A US$50 million European loan facility between ICICI Bank UK PLC (“ICICI”) as lender and STFL as a borrower;
v)	A US$225 million Asian revolving credit facility essentially with SEA as borrower and BNP Paribas Singapore as facility agent.
4.	The first four facilities can be considered together as “the European facilities” with STFL as borrower while the fifth, “the Asian facility”, can be regarded separately, with SEA as borrower.  The facilities are unsecured but benefit from guarantees from other members of the group.  Some of the facilities are multicurrency arrangements but it is convenient to state the values in US$. 
5.	At 20 January 2014 the total indebtedness of the group was about US$2.2 billion.  
6.	All the facilities are governed by English law and subject to the exclusive jurisdiction of the English courts. 
7.	The group has experienced serious financial difficulties.  These are said to arise from a general decline in the global steel market, a delay in delivering production from the group’s Indian business, losses and provisions made in relation to the group’s UK trading business and significant losses from the failure of a large counterparty.  
8.	In early 2013 the group approached its lenders to extend the 2012 European facility which was due in May 2013.  This was not possible and the group defaulted when that facility fell due.  This caused a cross-default under certain of the other facilities.  The group entered into a standstill agreement whereby the lenders agreed not to take enforcement action.  Since then the group and the lenders (represented by a co-ordinating committee) have been negotiating.  The group and the lenders represented by the co-ordinating committee agreed to a proposed restructuring of the group.  The purpose of the schemes before the court is to implement those restructuring proposals.  Absent successful implementation of the proposed restructuring, it is likely that the companies (SEA and STFL) will enter insolvency proceedings. 
9.	The purpose of the proposed restructuring is to refinance the ongoing trading of the group by the provision of a new US$1.15 billion trade finance and borrowing base facility (TFBB) which will be made available to the group creditors.  The existing facility agreements will be consolidated, amended and restated into a new term loan facility agreement under which both STFL and SEA will be parties.  The new term loans will have extended maturity dates of 31 December 2015.  The Asian revolving credit facility will be converted into a single term loan while the total debt in the European facilities will be converted into a group of term loans known as “Super Senior”, “Senior” and “Junior”.  The Super Senior loan will be for US$200 million.  The amounts in the Senior and Junior facilities are not fixed from the outset but will depend on the participation by the STFL scheme’s creditors in the TFBB.  The debt will then be repaid from a number of sources including an amount of cash generated from the sale of assets and currently held pursuant to the standstill agreement (referred to as “blocked cash”).  It will also include the proceeds of disposal of the group’s Indian business.
10.	In order to give an incentive to the STFL scheme creditors to participate and in order to compensate them for the additional exposure they will assume, the terms provide that the greater the amount that each creditor commits under the TFBB, the greater the proportion of its claims under the European facilities will be allocated to the Senior as opposed to the Junior loan.
11.	The term loans and the TFBB will be secured by common security and guarantees.  The proceeds of the security and guarantees will be shared pari passu amongst the lenders subject to two exceptions.  First the proceeds of certain assets are subject to mandatory prepayment obligations and second, the European term loans rank as between themselves in the order Super Senior, Senior and Junior. 
12.	As soon as reasonably practicable after the effective date payments will be made from the blocked cash in partial repayment of the term loans in various ways, the details of which do not matter save for one point.  The point worth mentioning is that the repayments will give a degree of priority treatment to the Asian term loan to reflect the fact that, on an insolvency of the Stemcor group, the lenders under the Asian facility would be in a better position than the lenders under the European facilities.
13.	An “equity fee” equal to 49% of the equity value of the group as at 30 June 2016 (payable upon certain trigger events and calculated by reference to the enterprise value of the group) will also be payable to STFL scheme creditors in proportion to their participations in the Super Senior European term loan and the TFBB.
14.	The directors of the companies believe that the restructuring should result in all scheme creditors receiving no less than they would receive in the most probable alternative (insolvency) scenario.
15.	The STFL Scheme is between STFL and the STFL Scheme Creditors i.e. the lenders under the European facilities.  The SEA Scheme is between SEA and the lenders under the Asian facility.  Both the STFL Scheme and the SEA Scheme are contained in a single scheme document.  The terms provide for the various steps outlined above along with the other detailed arrangements to bring them about. 
16.	Overall, the effect of the restructuring will be to repay part of the European and Asian facilities, to restructure the remaining lending into term loans with extended maturity and to provide the group with a new finance facility which will enable it to continue trading.
17.	On 29th January 2014 the matter came before Rose J.  She ordered that meetings of scheme creditors be convened.  She dealt with the issue of jurisdiction: STFL is an English company but SEA is incorporated in Singapore.  Rose J held that the court had jurisdiction to sanction both schemes.  There is no need to revisit that on this occasion.
18.	Although there are some differences in maturity dates, interest rates and fees and also in the guarantees in the various European facilities; the former are not sufficiently significant to mean that the lenders need to be placed in different classes and the latter is not a difference in the rights of the lenders as against STFL itself.  All the European STFL creditors are unsecured and would have the same rights as unsecured creditors in the event of the insolvency of STFL.
19.	All STFL creditors are being treated in the same way under the STFL scheme.  Each will receive a share of the European term loans pro rata to its existing lending.  Each will participate in the Super Senior European term loan in proportion to its total participation under the European facility.  The balance of each STFL scheme creditor’s claims will be allocated to the Senior and Junior term loans as described already.
20.	Before Rose J, no scheme creditor disagreed with the companies’ proposals in relation to the composition of the meetings or of classes of creditors.  The judge dealt with this and directed a single meeting of creditors for each scheme.
21.	The meetings were duly held on 19th February 2014.  The STFL scheme was approved by 44 scheme creditors representing 100% by number and 100% by value of the creditors present at the meeting.  This represented 90% of all STFL scheme creditors and 95% by value.  The SEA Scheme was approved by 16 scheme creditors, representing 100% by number and 100% by value of the creditors present at the meeting.  Thus both meetings were plainly properly representative of the interests of all of the respective scheme creditors and in each case the scheme was approved by the overwhelming majority of scheme creditors.
Sanctioning the schemes
22.	Section 899(1) of the 2006 Act provides as follows:

“If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the meeting summoned under section 896, agree a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.”

23.	This sanction hearing is the third stage in the process undertaken in relation to a proposed scheme of arrangement (Re Hawk Insurance Co. Ltd [2001] 2 BCLC 480 at p.510h).  The first stage was the hearing of the application to convene meetings of creditors which came before Rose J.  The second stage was the meetings themselves. At this third stage, the Court is concerned, firstly, to determine whether the requirements of section 899 have been complied with so that it has jurisdiction to sanction the schemes and, secondly, if it does have jurisdiction, whether it should exercise its discretion to sanction the schemes.
24.	The schemes are each a compromise or arrangement between the relevant company and its creditors or any class of them (section 895(1)(a)).  Accordingly, the provisions of Part 26 of the 2006 Act apply.  Further, as Rose J found at the convening hearing, the two companies are each liable to be wound up under the Insolvency Act 1986, there is a sufficient connection between the companies and this jurisdiction and there is no impediment under the Judgments Regulation to the jurisdiction of this court.
25.	In relation to the jurisdiction to sanction a scheme under section 899, I must be satisfied that:
i)	the meeting or meetings of creditors have been summoned and held in accordance with the order of the Court convening the meeting of creditors; 
ii)	the proposed scheme has been approved by the requisite majority of those present and voting at the meeting or meetings; and
iii)	the creditors were treated in appropriate classes for the purpose of convening the meeting or meetings.
26.	The key evidence before me is in the form of the witness statements of Mr Soden (Chairman of the Board of SHL) and Ms Kaiser (Project Manager at SHL, one of the group companies) and the Chairman’s report of the meetings.  The evidence confirms that the meetings were properly summoned and held and also that the schemes were each approved by a requisite majority of scheme creditors present at the meeting.  Items (i) and (ii) are therefore satisfied.  
27.	In relation to item (iii) Rose J considered this at the earlier hearing.  No objection was taken before me to the definition of the classes and so, given the observations of Chadwick LJ in Re Hawk Insurance Co. Ltd (p513) I do not propose to revisit the issue in any depth.  In any case I summarised the basis for placing the STFL creditors in a single class above.  I can see no basis on the merits on which to contend that this was not appropriate. 
28.	Accordingly I am satisfied the court has jurisdiction to sanction the schemes.
Should the schemes be sanctioned?
29.	The Court must be satisfied that the arrangement is such as an intelligent, honest person acting in respect of his interest might reasonably approve (Re National Bank Ltd [1966] All ER 1006 at p1012).  Nevertheless as Lindley LJ recognised over a century ago, creditors are generally the best judges of what is in their commercial interest (Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at p409).  
30.	Each scheme is plainly one which in general terms an intelligent, honest man acting in respect of his interests might reasonably approve because the restructuring will allow the group to continue trading as a going concern with new financing.  On the evidence before me, the likely alternative would be for the companies in the group, including the particular companies before me, to go into some form of insolvency proceedings.  This would likely result in a substantially lower return for the scheme creditors.  The schemes will also preserve the claims of scheme creditors so that such claims will be paid from the cash presently available and from the proceeds of disposals and other sources.
31.	A particular aspect of the STFL scheme is that those STFL scheme creditors who contribute to the TFBB will have a portion of their debt converted to a higher priority status.  Mr Zacaroli submitted that on analysis this did not give rise to a concern or a lack of fairness which would justify the Court not sanctioning the scheme.  I accept that submission.  Given the fundamental situation in which the group finds itself, the alternative is insolvency and the likelihood of lower returns.  Moreover the opportunity to participate in the TFBB is open to all STFL creditors equally and they are therefore treated fairly in that respect.  Looking at the matter overall, the arrangement which ties participation in the TFBB to higher priority is a reasonable and proportionate incentive given the need for new funding.
32.	Another particular aspect relates to the position of two particular lenders – Nedbank and ICICI (see paragraph 3(iii) and (iv) above).  Under the STFL scheme all lenders under the European term loans will benefit from a common security and guarantee package. Hitherto Nedbank Limited and ICICI had more limited guarantees than the other lenders of the European facilities.  In other words the position of Nedbank and ICICI was somewhat different from the position of the lenders of the 2011 and 2012 revolving credit facilities.  Mr Zacaroli submitted that while this meant that the arrangements might have the practical effect of providing a greater benefit to Nedbank and ICICI than the other STFL scheme creditors, no unfairness was created.  I also accept that submission.  First, conferring an additional benefit on Nedbank and ICICI is not unreasonable or unfair in the circumstances where all STFL scheme creditors benefit from STFL having in place a single restructured loan facility with an extended maturity date since it will thereby give it time to repay its indebtedness owed to all STFL scheme creditors.  Second, as Mr Soden’s Chairman’s report explained, even ignoring the votes of Nedbank and ICICI, the remaining STFL creditors in any case voted firmly in favour of the STFL scheme.  Both by number and by value, 100% of the other STFL creditors present and voting at the meeting were in favour.  Since the value of Nedbank’s debt for voting purposes was about US$57million and the value of ICICI’s debt for voting purposes about US$35 million; the share of the total represented by the other STFL creditors voting in favour represents 86% of the total by number and 87% by value.  
33.	Third, a point arose about certain existing trade finance arrangements referred to as legacy transactions.  The issue is that some of the TFBB will be used to refinance these legacy transactions. The effect will be that those lenders to whom the group is liable in respect of these legacy transactions will benefit from having their liabilities repaid or having an indemnity.  I accept Mr Zacaroli’s point that this does not give rise to any fairness or class issues for the following reasons.  
34.	The legacy transactions point does not relate to the existing rights of STFL scheme creditors as against STFL, which are the subject of the STFL scheme, but rather concerns the rights under other separate lending which is not the subject of the scheme.  Thus no class issue arises.  
35.	As regards fairness, the position is as follows.  The evidence of Mr Soden showed that the lenders in respect of these legacy transactions are in practice secured by the asset the trade finance is funding.  Mr Soden also explained that the continuing availability of trade finance facilities was of critical importance to the group pending completion of the restructuring.  To achieve that the group was required to indicate that it would refinance these transactions following restructuring.  None of this is inherently surprising.  Some of the STFL scheme creditors are also creditors in respect of legacy transactions, and who might therefore benefit from this arrangement, but many are not.  The STFL scheme creditors who are not creditors in respect of legacy transactions seem to me to be the persons best able to judge their own interests.  Mr Soden explains in the Chairman’s report that if one distinguishes between those STFL scheme creditors who are or are not creditors in respect of legacy transactions, the STFL scheme creditors who are not creditors in respect of legacy transactions account for 57% of the total debt voting at the STFL scheme creditors meeting.  They also approved the scheme by a majority by number and value.  
36.	At the hearing Mr Swinnerton appeared for Anadolubank Nederland N.V. (“Anadolubank”). Anadolubank is one of the creditors under the 2012 European revolving credit facility.  The sum owed to Anadolubank is EUR7 million of the facility, which represents 0.88% of whole.  Anadolubank objected to the sanctioning of the schemes.  The objection was that the effect of the scheme was to alter the pari passu relationship between a creditor like Anadolubank and the other scheme creditors.  To benefit from a higher priority the scheme required the creditor to increase its exposure via the TFBB.  
37.	Mr Zacaroli submitted that the points taken by Anadolubank did not justify a refusal to sanction the scheme.  He submitted that while there was no guarantee all debts would be paid, the overall effect of the scheme put the group and all its lenders (including Anadolu Bank) in a better position going forward than they were in today.  In terms of fairness, the scheme with its TFBB element was fair because it was open to all European facility creditors to participate and because it was reasonable to give priority in future to those prepared to fund the TFBB.  He also made the point that in the end Anadolu Bank were simply a single creditor and given their exposure, if they had voted against the schemes at the meeting the overall outcome would have been the same.  I agree.  It seems to me that the points raised by Anadolu Bank do not expose an unfairness about the schemes as a whole and do not justify a refusal of the application. 
Amendments
38.	Inevitably given the complexity of the arrangements, the finance documents which provide for the schemes have been amended relative to the form they took before Rose J.  Some amendments arose after the hearing but before the meetings and some arose after the meetings.  Although some of the amendments are simply to correct typographical or technical mistakes, others are a little more substantial, being changes to clarify the drafting in a manner consistent with the overall commercial purpose of the transaction.
39.	The schemes also envisaged (clause 9.4) that modifications might be made to the terms following the meetings and that the court could sanction the schemes if satisfied that the modifications did not have a material effect on the interests of any scheme creditor.  Thus all the creditors have been aware that amendments of this kind might occur.  
40.	The amendments have been agreed by the companies and by the coordinating committee and were explained in Mr Zacaroli’s skeleton argument.  
41.	There is no need to go through the amendments in any detail.  I am satisfied that they are not material and have no adverse effect on the interests of any of the scheme creditors.
Effectiveness
42.	The court will not make an order with no substantive effect and accordingly, to sanction a scheme, the court needs to be satisfied that a scheme will be effective in practice (see Briggs J as he then was in Re Rodenstock GmbH [2012] BCC 459 at paragraphs 73-77 and Richards J in Re Magyar Telecom BV [2013] EWHC 3800 (Ch) at paragraph 16).  Three points arise in relation to this question.
43.	First, on the evidence before me the claims under all the European facilities and under the Asian facility are governed by English law.  Therefore Mr Zacaroli submitted that the compromise of the claims affected by the schemes will be effective as a matter of English law.  I accept that submission. 
44.	Second, the fact that SEA is incorporated in Singapore needs to be taken into account.  SEA obtained an opinion from Singaporean counsel (Kannan Ramesh S.C. of the Tan Kok Quan Partnership).  The opinion confirms that the Singapore courts would consider England the appropriate forum for the SEA scheme and that the Singapore courts would be likely to recognise and enforce the SEA scheme because it is a restructuring of an English debt (under the Asian facility) under English law and sanctioned by the English courts. 
45.	Third, the proposed equity fee which forms part of the schemes may fall within the scope of the US Securities Act of 1933.  However the companies provided an opinion on the point of a US attorney experienced in US Federal securities laws (Sarah Murphy of Freshfields Bruckhaus Deringer LLP).  Ms Murphy explained that in her opinion the companies will be able to rely on the exemption contained in s3(a)(10) of the 1933 US statute.  Mr Zacaroli submitted that this means the US statute will not form an impediment to the effectiveness of the schemes.  I accept that.
46.	Overall therefore I am satisfied the schemes will be effective if sanctioned.  
Conclusion
47.	I am satisfied that the schemes to restructure Stemcor Trade Finance Limited and Stemcor (S.E.A.) Pte Limited should be sanctioned by the court and I will make the order sought.