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When a scheme of arrangement involving compromise or arrangement is proposed between a company and its creditors under Section 86 of the Companies Law, the Court will consider whether it is appropriate to convene one or more meetings of creditors (the “Court Meetings”) for the purpose of voting on the compromise (the “Class Issue”). The Court must ensure that the rights of creditors attending each Court Meeting are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. Given the variety and complexity of ways in which creditors and companies may structure their affairs, this task is not one which is always straightforward.
If at the Court Meetings the creditors vote to approve the scheme, the Court must then consider whether it is appropriate to sanction the scheme (the “Sanction Issue”). The judgment in Re Ocean Rig UDW Inc (in provisional liquidation) concerned a US$3.7 billion restructuring of debt, which is the largest ever seen in this jurisdiction, and provides helpful guidance on how the Grand Court will approach both the Class Issue and the Sanction Issue.
Ocean Rig UDW Inc (in provisional liquidation) (“UDW”), formed part of a group of companies (the “Group”) carrying on business as an offshore ultra-deep water drilling contractor. The Group fell into severe financial distress due to the sustained depression in the price of oil. UDW and the other Group companies proposed a scheme of arrangement to their creditors seeking to compromise the Group’s US$3.7 billion debt (the “UDW Scheme” and collectively, the “Schemes”). UDW and three other entities in the Group proposing schemes were formerly incorporated in the Marshall Islands but transferred their country of incorporation to the Cayman Islands before the Schemes were proposed, presumably to take advantage of the favourable restructuring regime in the Cayman Islands. As part of the restructuring, the Group also filed for Chapter 15 bankruptcy protection in the US.
A group of creditors with secured claims against various companies in the Group and substantial claims against UDW pursuant to guarantees (the “Guarantee Creditors”) supported the Schemes and considered that a single class of creditors (and therefore a single Court Meeting) was appropriate in respect of UDW. However, Highland, which held notes in UDW (and held claims only against UDW) opposed the UDW Scheme and considered that the noteholders of UDW had different rights to the Guarantee Creditors and did not share a common interest. Accordingly, Highland submitted that the noteholders in UDW should form a separate class of creditors from the Guarantee Creditors and attend their own Court Meeting.
Given the substantial claims by the Guarantee Creditors against UDW, it was clear that if a single Court Meeting was convened to vote on the Scheme, the Guarantee Creditors would have a sufficient majority to approve the Scheme, regardless of Highland’s opposition. However, if the UDW noteholders were deemed to form a separate class, (and a separate Court Meeting was held accordingly) the value of Highland’s claims relative to the other UDW noteholders’ claims would give Highland a blocking vote. If Highland continued its opposition it could therefore defeat the Scheme as a majority must be achieved at all Court Meetings under the Companies Law.
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A Matter of Class: Determining Creditor Classes in a Scheme of Arrangement