Smile Telecoms – New restructuring regime in practice

In this article, we look at the recent case of Smile Telecoms and the development of their new restructuring plan, introduced during the Covid pandemic by the Corporate Insolvency and Governance Act 2020, in which only one class of creditors (the super senior creditors) were permitted to vote on the basis that the other creditors and members had no genuine economic interest in the company. This will be of interest to companies that might be looking to restructure now, or in the future.

Background

Smile and its subsidiaries (“the Group”) provide internet and telecommunication services in Africa. Smile had been experiencing ongoing financial difficulty for some years and the Group engaged in negotiations with lenders and proposed a restructuring plan to facilitate the provision of urgent funding, which was sanctioned by the Court on 30 March 2021 and concluded on 11 May 2021. This was its first restructuring plan.

Under the plan, Smile’s majority shareholder provided USD $51 million via a company called 966 CO.S.A.R.L (“966”) to Smile to stabilise the Group’s position and allow it to dispose of certain non-core assets in Tanzania, the Democratic Republic of Congo, Uganda and Nigeria.  The loan had a maturity date of 31 December 2021 (“the Super Senior Facility”).

The Group failed to receive offers sufficient to meet its outstanding debts.

Under the Super Senior Facility, Smile owed USD $63,620,000.  It was the only class of creditors which were predicted to get any return following the sale of the assets where the total outstanding amounts to various lenders was USD $400,894,206.

Smile’s debts were subject to an Inter Creditor Agreement which, amongst other things, restricted it from selling the group’s Nigerian business and assets unless the net proceeds of the disposal, together with other realisations, would be sufficient to repay lenders at par.

Since the first restructuring plan Smile has faced a liquidity shortage and has engaged in ongoing discussions with its lenders. On 9 December 2021, 966 agreed to forebear from exercising its right to demand payment of the Super Senior Facility until 31 March 2022 but this forbearance would terminate if any senior lender commenced enforcement action, or if Smile did not launch the secondary restructuring plan. Smile would have become cashflow insolvent as of 31 December 2021 if not for the forbearance of 966.

On 6 January 2022, 966 provided USD $5 million emergency funding facility to allow the Group to continue to operate which included an event of default that would be triggered if the restructuring plan was not implemented.

The restructuring plan proposed the injection of additional liquidity to avoid Smile from entering administration immediately and the implementation of the restructuring of the Group’s indebtedness to facilitate the disposal of assets on a solvent basis.

Smile submitted that the relevant alternative to the restructuring plan was the immediate administration of the company and subsequent liquidation of several of the company’s operating subsidiaries.

What is Section 901C(4)

Section 901C(4) of the Companies Act 2006 provides that on an application a plan company can seek an order of the Court to exclude a class from voting if it can satisfy the Court that the class of creditors had no genuine economic interest in the company. This Section is different to Section 901G(4) of the Companies Act 2006 which allows a dissenting creditor class to be bound by the plan proposal, so long as no member of the dissenting class would be any worse off than in the relevant alternative and one class, that is “in the money”, votes in favour of the plan.

The bar in Section 901C(4) is much higher than that in Section 901G(4) as it requires the company to demonstrate that the compromised class of creditors has no genuine economic interest in the company, as opposed to no prospect of a better financial outcome under the relevant alternative than under the proposed restructuring plan.

Smile proposed that only one of eight classes of creditors and members, being the Super Senior Lenders, should be entitled to vote on the restructuring plan on the basis that the value breaks in this class, and no other class of creditors or members, have a genuine economic interest in the company. Therefore Smile argued that it should be permitted to use the streamlined procedure provided for in Section 901C(4), which would avoid the time and cost of convening 8 different classes of creditors and shareholders.

Further, pursuant to the terms of the proposed restructuring, it was proposed that Smile’s ordinary and preference shareholders would be varied by the conversion of the ordinary and preference shares into redeemable deferred shares which could be redeemed for nominal value.  New ordinary shares were also to be issued to 966 resulting in it owning 100% of the company’s share capital.

Afrexim Bank sought to challenge the jurisdiction of the Court on such terms given that Smile was incorporated in Mauritius.  In addition, in the context of solvent schemes, it was generally considered that it was not possible to sanction a scheme which involved an alteration of shareholders rights. Smile argued that, in the case of a restructuring plan between an insolvent company and its creditors and shareholders, the Court does have jurisdiction to sanction a plan which proposes to alter the rights of shareholders. Smile also indicated that it could provide evidence at the sanction hearing that the restructuring plan which included the amendment of shareholder rights, would be recognised in Mauritius. That issue remains to be considered further by the Court at the sanction hearing.

The result

The Court made an order to convene a single class of Smile’s Super Senior creditors as it was satisfied that only this class of creditors had a genuine economic interest in the company.  Myles J noted that “Senior Lenders are well out of the money.  This does not appear to be a marginal case.” The Court was also satisfied that it had jurisdiction and that Smile had sufficient connection with England. Myles J said that in considering whether a creditor had a genuine economic interest in the company the Court must consider the relative alternative and should address the question by “applying the civil standard of balance of probabilities”.

As a result, none of the company’s other creditors, or members, had been invited to vote on the restructuring plan. No Senior Lenders, or other parties, appeared before the Court to challenge the application.

Myles J noted the following when making the order:

• The Senior Lenders had accepted the appointment of FBN Quest for the preparation of the valuation, which was provided to all interested parties that agreed to sign an NDA and the valuation was subsequently reviewed by PWC on behalf of the Senior Lenders. Further, the sale process was undertaken by an experienced Bank and monitored by both Grant Thornton, on behalf of the Senior Lenders, and PWC.
• The valuation had been “thoroughly investigated” and explored by the Senior Lenders and their advisors.
• Based on the estimated outcome statement, the Senior Lenders were clearly out of the money.
• Smile had in fact provided “the best valuation of the assets”, noting that in the estimated outcome statement the auditor applied a valuation discount within the normal range for a distressed sale and supplemented this valuation evidence with the actual marketing and sales process evidence to date.