The recent judgment by Mr Justice Snowden in the English case of Indah Kiat International Finance Company B.V. [2016] EWHC 246 (Ch) (Indah Kiat) adjourning the convening hearing in respect of a scheme of arrangement highlights the importance of providing sufficient notice to scheme creditors and allowing sufficient time to prepare scheme documents. Although an English case, it is persuasive, and likely to be followed in the offshore Courts.
Background
Indah Kiat is part of the Asia Pulp and Paper (APP) Group of Companies which focuses on manufacturing pulp, paper and packaging related products. In March 2001, APP announced a unilateral and global standstill on its debt repayments, which resulted in Indah Kiat defaulting on the repayment of its US$200 million 11.875 per cent guaranteed secured notes due 2002 and its US$150 million 12.5 per cent guaranteed secured notes due 2006 (together, the Notes). The Notes are guaranteed by PT Indah Kiat Pulp & Paper Tbk (the Parent) and became subject to a number of judgments against Indah Kiat and its Parent in the Supreme Court of New York between 2004 and 2006 (together the US Judgments). However, following attempts to enforce the Notes in Indonesia, Indah Kiat and the Parent became engaged in protracted litigation in the Indonesian courts which eventually resulted in a decision of the Indonesian Supreme Court in 2011 purporting to invalidate the Notes and the obligations of Indah Kiat and the Parent in relation to them.
In March 2015, APP Investment Opportunity LLC (APPIO) became a judgment creditor under the US Judgments pursuant to an assignment from the trustee of the Notes and therefore, became entitled to take enforcement action in its own name. APPIO sought to take steps to enforce the US Judgments, which appears to have prompted Indah Kiat and the Parent into promulgating an English scheme of arrangement (Scheme) pursuant to Part 26 of the Companies Act 2006.
The Scheme seeks to release and discharge Indah Kiat and the Parent from all of their liabilities pursuant to the Notes and the US Judgments in return for (i) the issue by the Parent to scheme creditors of new unsecured notes (or equivalent loan participations), together with a cash payment by the Parent of about 13.5 per cent of the face value of the existing Notes; or (ii) alternatively, a cash payment of 25 per cent of the face value of the Notes (subject to an overall cap of US$8 million).
Inadequate notice
Indah Kiat sought an order to convene a single meeting of its scheme creditors. The application was strenuously opposed by APPIO and at the convening hearing on 21 and 22 January 2016, Mr Justice Snowden agreed with APPIO to an adjournment of the scheme meeting on the basis that inadequate notice of the convening hearing had been given, particularly in light of:
- the complex nature of the Scheme; and
- there being no justification for an urgent hearing.
Mr Justice Snowden said what constitutes adequate notice will depend on all the circumstances. The more complex or novel the scheme, and the less consultation that has taken place with creditors as a whole before the scheme is launched, the longer the notice should generally be. That said, if the scheme is being put forward as a matter of great urgency when the company is in real financial distress, there may not be time to give very much notice to creditors if a default is to be avoided. However, in the absence of evidence of real urgency, the Practice Statement should be followed and a sufficient period of notice given of the convening hearing to enable scheme creditors to consider the matter, take advice and, if desired, participate at the hearing. Mr Justice Snowden said that the Court must be astute to detect any attempt to "bounce" creditors into a convening hearing on inadequate notice.
In the present case, Indah Kiat disseminated the "Practice Statement letter" to scheme creditors through the clearing systems 14-days prior to the convening hearing. Mr Justice Snowden held that this was inadequate notice for a scheme of this type and adjourned the convening hearing for a period of at least six-weeks, which was the period of time requested by APPIO.
Take "aim" at the witness statement and explanatory statement
Mr Justice Snowden also raised a number of other concerns in relation to the evidence adduced by Indah Kiat, most notably:
- The Scheme application by Indah Kiat was supported by two witness statements from a director who had only recently been appointed and had little or no personal knowledge of the matters before the Court. Instead, the director relied upon information from "colleagues" and "relevant people" without stating the sources for any matters of information and belief, falling short of the requirements set out in CPR 32PD.
- Whether or not there is any opposition to the Scheme, Indah Kiat "has a duty to make full and frank disclosure to the Court of all material facts and matters which may be relevant to any decision that the Court is asked to make."
- The inadequacy of evidence in relation to the identity of the largest supporting creditor and questioned its independence.
- The explanatory statement and fairness opinion should contain a full analysis of all of the alternatives to the Scheme.
- The explanatory statement should also disclose any releases to be given to current and former directors of the company and the potential financial effect of those releases on scheme creditors.
- The company should also make clear whether or not the authors of any fairness opinion provided to scheme creditors are prepared to accept responsibility to scheme creditors for that opinion.
The Indah Kiat judgment will be of particular interest to debtors, stakeholders and their advisors considering implementing a scheme of arrangement. It emphasises the need to carefully determine the length of notice to be given to scheme creditors and to provide convincing evidence if there is any urgency for a hearing within a period of two weeks or less. Indah Kiat is also a useful reminder of the "3 P's" when it comes to drafting schemes of arrangement and its supporting documents – "Preparation, Preparation and More Preparation" - to ensure that the scheme is as robust and compliant with applicable practice directions as soon possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
