England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANY COURT

		Royal Courts of Justice The Strand London WC2A 2LL
		23rd March 2009

1. MR JUSTICE NORRIS: Castle Holdco 4 Limited is a Cayman Islands incorporated company which is in the ultimate control of a Delaware LLC. It is the holding company for Countrywide Plc, an English and Welsh company, and its five trading divisions which operate through nine subsidiaries in the field of estate agency, lettings, financial services, professional services and conveyancing.
2. Because of a sharp deterioration in the housing market, the decline in transactions has had a predictable effect on the business of the group to the extent that there has already occurred an event of default in relation to one series of security documents which underpin the company's funding. A scheme of arrangement is proposed to stabilise the business and to avert what might otherwise be a descent into an insolvency regime.
3. This is the company's application for the convening of meetings in relation to that Scheme of arrangement. The Scheme did not originate with the company but with a group of certain of its funders, but the proposal has received consideration by an independent committee of the Board, that is to say directors who are unconnected with the proponents of the Scheme. It is conceivable that that consideration and these present proceedings may themselves constitute an event of default under the relevant securities but it is unnecessary to decide the point.
4. The present application is part of a broader process to render the Scheme effective in the Cayman Islands and to secure relief in New York under Chapter 15. It is sufficient for present purposes to note that Holdco is governed by the laws of New York but that the security documentation which underpins the company's funding is governed by the laws of England and Wales.
5. There are three sources of funding relevant to be considered. The first is a £100 million revolving credit facility provided through lead arrangers. It is secured by a first priority fixed and floating charge over the assets of Castle Holdco and is supported by a secured guarantee from the subsidiaries.
6. The second funding to which my attention has been directed is a total of £470 million Senior Secured Floating Rate Notes. There are two issues of these notes. They share the first priority fixed and floating charge over the assets but, by virtue of an inter-creditor agreement, on enforcement they will rank after the revolving credit facility.
7. These loans are also guaranteed by the subsidiaries. The form of the facility is a global loan note of which the registered holder is BT Globenet Nominees Limited as nominee for the common depository which is the London branch of Deutschebank AG.
8. The third tranche of funding consists of £170 million of 9 7/8 per cent Senior Notes. These are secured in a different way by having second priority pledges over the shares in Countrywide Plc (and also over the shares in Castle Holdco). This security too is governed by the laws of England and Wales and again operates by way of a global note where BT Globenet Nominees is the nominee for the same common depository.
9. Shortly put, the restructuring proposed by the group of note holders consists of the recapitalisation of Castle Holdco by the injection of new equity accompanied by a Scheme under which there is a debt-for-equity swap and the issue of a new series of loan notes which will reduce the overall indebtedness of Castle Holdco from £740 million to £175 million.
10. As well as the debt-for-equity swap note holders are also to be given the right to participate in a further equity issue. The proceeds of the equity issue are to be used to repay the revolving credit facility. There will be a release of inter-company claims within the group, and the entire restructuring is conditional on the satisfaction of various conditions set out in full in the Explanatory Statement but to which it is unnecessary to refer.
11. I am concerned at this hearing to be satisfied as to the proposals for the convening of meetings. It is proposed that there be two such meetings: a meeting of the Floating Rate Note Scheme Creditors, who are defined as "persons with a beneficial interest as principal in the Floating Rate Notes held in global form" and, secondly, a meeting of the Senior Note Scheme Creditors, who are the "persons with a beneficial interest as principal" in the Senior Notes.
12. A preliminary question arises as to the jurisdiction to convene meetings in respect of a Caymans company. I am satisfied that under Part V of the Insolvency Act 1986 this court would have jurisdiction to wind up a Caymans company, that accordingly such a Cayman company falls within the scope of section 895(2)(b) of the Companies Act 2006. As well as having jurisdiction to take that course, I am satisfied that the court would exercise its discretion to wind up such a foreigncompany if there were a sufficient connection between that company and England and Wales as exemplified in the decision of the court in Drax Holdings [2004] 1 WLR, 1049.
13. I am satisfied that in the instant case there is such a connection, for the reasons set out in paragraph 56 of the witness statement of Mr Grenville Turner, namely, that Castle Holdco's main asset is its shares in Countrywide Plc which is a company incorporated in England and Wales, that Castle Holdco is tax resident within England and Wales and its centre of main interests lies in England. Furthermore, the documents which create security over its assets are governed by English law. It is as a matter of fact registered as a foreign company at Companies House. I accordingly hold that I have jurisdiction and can properly exercise it in the instant case.
14. The issues which arise in connection with the meetings require me to consider in effect whether what is proposed is one Scheme or two linked Schemes, whether the proposed categories of person can together consult fairly in respect of their common interests and whether I may so constitute the meetings as to avoid a direction to hold a meeting which might have the effect of giving a minority a veto over the Scheme.
15. I have considered matters under three headings, namely the categories of meeting, the composition of the meeting and the venue of the meeting.
16. So far as categories are concerned, I am satisfied that it is appropriate in this case to constitute two meetings as is proposed, namely that of the Floating Rate Note holders and that of the Senior Note holders.
17. So far as the Floating Rate Note holders are concerned, as I have indicated, there is £470 million in issue which falls into two categories: first a category of £370 million of secured Floating Rate Notes and secondly a further category of £100 million of "Payment In Kind Election Notes". They have in common that they are both secured by the same security, both guaranteed by the subsidiaries, both subject under the inter-creditor agreement to the revolving credit

facility and they rank pari passu between themselves. The difference between them is that until 2011, in the case of the Payment In Kind Election Notes, Castle Holdco has the option effectively to roll up interest. There is the further slight difference that the rate of interest between the two notes is on that account different.

18. I accept the submission of Mr Dicker QC that this difference is not a material difference for the purposes of the Scheme. In both cases the question is whether the holder of the note is going to participate in a debt-for-equity swap and receive a proportionate allocation of shares and new notes or whether he chooses to stand aside from the Scheme and remain at risk of default in the immediate future. That is a sufficient common ground which is unaffected by the different rights attaching to the notes.
19. So far as the Senior Note holders are concerned, they differ from the Floating Rate Note holders because the nature of their security is different, and also because under the Scheme they will not receive new notes but are wholly dependent upon their receipt of new shares. Accordingly they cannot meet with the Floating Rate Note holders but can plainly meet between themselves.
20. In considering whether there was any other category which ought to be invited to attend a meeting, my attention was drawn to the existence of correspondence emanating from Messrs Jones Day on behalf of a group of interested investors who hold shares in Companies further up the corporate structure than Castle Holdco
21. They appeared briefly by Mr Steven Atherton QC to invite me to note their interest and in order to secure the provision of Scheme documents, which has been readily forthcoming on the part of the company. But Mr Atherton QC did not suggest that the interested investors constituted a class which ought to be convened to a separate meeting.
22. Being satisfied as to the categories of meeting, I turn briefly to consider the composition. The form of the funding by means of global notes poses some difficulties. As I have indicated, the notes are in each case held by a nominee for a common depository. The common depository is not of course the owner of the notes. The notes are in fact held through two electronic book entry systems operated by Euroclear and Clearstream, by ultimate owners. Those ultimate owners, the account holders, may themselves be beneficial owners or, alternatively, they may themselves hold for clients sometimes directly or sometimes through intermediaries such as banks and brokerage houses.
23. When the Scheme of arrangement comes to be considered, it ought obviously to be considered by those who have an economic interest in the debt, that is to say, by the ultimate beneficial owner or principal. Castle Holdco itself is not generally concerned with who is the ultimate beneficial owner. Indeed the security

documents themselves contain a provision that Castle Holdco shall treat the common depository or its nominee as the absolute owner of the global security for all purposes. However, the security documentation does contain a mechanism whereby the beneficial owner can upon request become a direct creditor of Castle Holdco.

24. On the occurrence of an event of default, there is a provision that the global security is to be transferred to the beneficial owners in the form of definitive securities upon the request by the owner of a book entry interest. It has been submitted to me, and I accept, that the ultimate beneficial owners may therefore be properly regarded as contingent creditors of the company and indeed of each of the subsidiarieswho have provided a guarantee.
25. Accordingly, when the meeting is convened, it is to those principals or beneficial owners that the relevant notices ought ultimately to be directed, and it is theirvotes not the vote of the common depository or of the nominee which will count. To avoid any danger of double-proof or double-counting of votes, in each Scheme the common depository has undertaken not to vote.
26. I have been referred to the arrangements put in place for eliciting the views of the principals or ultimate beneficial owners. Notice of the Scheme is to be sent through the clearing system to the account holders. The ultimate owner is to be requested via the account holder and any intermediary to submit a response to an information coordinator by a specified date.
27. That short summary scarcely does justice to the thoroughness of the Scheme but suffices to convey its import. I am satisfied that the arrangements in place are sufficient to elicit the views of those who count.
28. The point has been made in the course of submissions that some of the contingent creditors so characterized may have other interests in Castle Holdco or other benefits to be derived from the restructuring. The question has arisen whether this presents any difficulty and whether they should be treated any differently. For example, some of the Scheme Creditors are also funders under the revolving credit facility which it is intended to repay out of the proceeds of the additional equity. Some of the note holders are also directly or indirectly interested in the equity in Castle 4. I regard these differences as inherent in the present structure and not differences which arise under the Scheme. The rights qua creditor which are to be adjusted by the Scheme are the same for these people as for every other note holder and they will be treated in exactly the same way on the implementation of the Scheme.
29. I propose to take as definitive for present purposes the test propounded by Lord Millett in UDL Argos Engineering in the Count of Quarter Final Appeal of Hong Kong at paragraph 27 of his judgment where he said:

"The test is based on similarity or dissimilarity of legal rights against a company not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against a company is not a ground for calling separate meetings."

30. In the instant case the legal rights, whether original or under the Scheme, are identical within the relevant classes so they can work together. The significance of their private interests can be taken into account when sanction is sought for the Scheme. I take the same view of irrevocable "lock-up agreements" which have been entered into. They do not affect the constitution of the meetings. But again they may affect the sanctioning of the Scheme.
31. I note in this connection that in fact the present Scheme has commanded the assent of a very substantial majority both of the Floating Rate Note holders and of the Senior Note holders.
32. The final matter I have considered in relation to the meetings is the venue. For the reasons which were given by Mr Turner in paragraph 81 of his witnessstatement, I am satisfied that London is an appropriate venue for a meeting concerning the affairs of a Cayman company, part of whose affairs are governed by the law of New York. As Mr Turner says, a number of the note holders, indeed those who signed the lock-up agreements, operate in London. When the securities were marketed they were marketed in London. The guarantors are situated in London. The company is tax resident and has all of the connections with England and Wales to which I have already adverted. I am accordingly satisfied that the meetings for which directions are sought in the draft Order may properly be convened in accordance with that Order.
33. I should briefly note that I am satisfied that the requirements of the Practice Direction have been fulfilled in relation to the giving of notice of the present account holders. I have focused on the Scheme of arrangement concerning Castle Holdco. That is because it is the key. There are subsidiary Schemes of arrangement in connection with the subsidiaries. They are straightforward. Under those Schemes the note holders will release their claims under the guarantees in return for Castle Holdco entering into the principal Scheme. No separate questions arise in relation to those Schemes.
34. As a footnote I should say that I intend to exercise the court's jurisdiction to grant declaratory relief in relation to the appointment of an authorised representative for the purpose of applying in the United States for Chapter 15 relief in accordance with the view expressed by David Richards J in Telewest [2004] BCC 342 at paragraph 61.
35. I am grateful for the care with which I was taken through the proposed Scheme.