Smile Telecoms: first UK restructuring plan to exclude 'out of the money' creditors

Quick read

The UK High Court has excluded 'out of the money' creditors and shareholders from voting on Smile Telecoms Holdings Limited’s (Smile) restructuring plan because they did not have a genuine economic interest in the company.

Background

Under Smile's first restructuring plan, in 2021, its majority shareholder advanced a super senior facility to enable the company to trade while a sales process was carried out. The sales process failed to generate sufficient funds and Smile required additional liquidity to avoid administration. A new plan setting out a more substantial restructuring was proposed.

Decision

A company proposing a restructuring plan must convene a meeting of every member or creditor that is 'affected by' the plan.

The court has discretion at the convening hearing to exclude some classes from voting on the plan if it can be demonstrated that no member of the relevant class has a genuine economic interest in the company in the relevant alternative to the restructuring plan, (here administration).

The court found that this was ‘not a marginal case’, it was certain that the excluded creditors and members would receive nothing in the relevant alternative. Only the super senior class of creditor was entitled to vote on the plan. The judge emphasised the importance of valuation evidence and sufficient notice and disclosure being given to creditors/members proposed to be excluded from voting.

Restructuring plan 'firsts' include:

‘Out of the money’ creditors and members excluded from voting.
A meeting for a single class of creditor convened.
Potential for a restructuring plan to compromise the rights of members of a foreign incorporated company.

Challenge

Shortly before the sanction hearing an 'out of the money' creditor submitted an alternative valuation, disputed Smile’s valuation evidence and claimed that it has been unfairly excluded from the vote. The Court has delayed the sanction hearing until 10 March 2022 to allow this and other issues raised to be considered.