In The Matter of Bluebrook LTD in The Matter of IMO (UK) LTD in The Matter of Spirecove LTD in The Matter of The Companies Act 2006

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In The Matter of Bluebrook Ltd

In The Matter of IMO (UK) Ltd
In The Matter of Spirecove Ltd
In The Matter of the Companies Act 2006
Case No: 15856 of 2009
High Court of Justice Chancery Division
11 August 2009
[2009] EWHC 2114 (Ch)

2009 WL 2392294
Before: Mr Justice Mann
Date: 11/08/2009
Hearing dates: 3rd, 4th and 5th August 2009
Representation
Mr. R. Dicker Q.C. and Mr. R. Fisher (instructed by Latham & Watkins (London) LLP ) for
the Companies.
Mr. D. Chivers Q.C. and Mr. S. Horan (instructed by Gide Loyrette Nouel LLP ) for the
Mezzanine Co-ordinating Committee.
Mr. G. Moss Q.C. and Mr. A. Al-ATTAR (instructed by Lovells LLP ) for the Senior
Steering Committee.
Judgment
Mr Justice Mann:
Introduction
1 This is an application for the court's sanction of three schemes of arrangement, each of
which is between one company and lenders described as Senior Lenders. Those
companies are Bluebrook Limited (Bluebrook), IMO (UK) Limited (IMO) and Spirecove
Limited (Spirecove). On 3rd July 2009 Arnold J made an order convening meetings of
the scheme creditors, and those meetings took place on 29th July 2009. At each of the
meetings the schemes were approved by a majority which very significantly exceeded the
statutory majority, so that the relevant class of creditors approved each of the schemes.
Only two members of that class in number, amounting to no more than 5% of the debt,
voted against. The present challenge to these schemes comes not from those two
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creditors, or indeed from any member of the class of scheme creditors. Instead, it comes
from representatives of a class of subordinated creditors. They maintain that the schemes
operate unfairly to them because they deprive them of any valuable rights against the
companies. Whether that is right or not is the question that I have to decide at this stage
of the proceedings.
Background
2 Bluebrook is the holding company of a group of companies which operates the biggest
carwash business in the world. The business is operated by a number of subsidiaries in a
number of countries around the world. IMO and Spirecove are indirect subsidiaries of
Bluebrook. Bluebrook is indebted to a consortium of lenders. This is the Senior Debt, and
for present purposes its current amount can be taken as being 313m. The value varies a
little depending on the sterling/euro exchange rate. The indebtedness is guaranteed by
other companies in the group, including IMO and Spirecove. The indebtedness is
supported by a range of debentures under the security so as to charge the value of the
group. The lenders under these transactions are called the Senior Lenders.
3 Spirecove is indebted to another group of lenders, called the Mezzanine Lenders. The
level of this debt can be treated in round terms as being 119m (including unpaid
interest). Again, that indebtedness is secured by a range of securities covering the assets
of the group. The actual trading is carried out by companies lower down in the group.
Their various identities do not matter for the purposes of this judgment.
4 Various subordination arrangements are in place which firmly subordinate the
Mezzanine Lenders to the Senior Lenders. The arrangements are contained in an
Intercreditor
Agreement
dated
8th
February
2006
(as
amended,
restated
and
supplemented from time to time). I do not need to set out the detailed provisions of that
agreement. I can summarise the relevant provisions as follows:
i) Clause 2 deals with the ranking of the debt. The Senior Debt ranks first; the
Mezzanine Debt ranks second. (They are followed by other levels of debt which I do not
need to deal with).
ii) Clause 6 deals with the subordination of the Mezzanine Debt. In essence, repayment
of the Mezzanine Debt cannot be made, or sought, until the Senior Debt has been paid.
Clause 6.8 is a turnover clause; - if any of the Mezzanine Lenders receive a payment
in respect of its debt, which is not permitted under the Intercreditor Agreement , then it
will pass it on to the Senior Lenders.
iii) Under clause 11.4 the security agent under the agreement is given authority by all
the creditors to release security and to release liabilities in respect of any enforcement
action by any of the creditors, provided that any proceeds from enforcement are
applied in accordance with the Intercreditor Agreement (i.e. from the top down).
iv) Under clause 12 the Mezzanine Lenders are given an important right. In the event
that they are not content with certain enforcement actions, they can compel a sale to
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them of the rights and obligations of the Senior Lenders for the amount of the
outstanding Senior Debt.
v) Clause 13 provides that on the occurrence of an Insolvency Event (winding up,
administration and so on) the Mezzanine Debt is subordinate in right of payment to the
claims of the Senior Debt.
vi) Clause 14 provides for the proceeds of any enforcement to be applied (after certain
fees, costs and expenses) in discharge of the Senior Debt and then the Mezzanine Debt
and so on.
5 Thus the prospect of recovery by the Mezzanine Lenders is very firmly subordinated to
the prior rights of recovery of the Senior Lenders. No-one has questioned the efficacy of
those arrangements in the hearing before me.
6 The funding arrangements which are organised by the Intercreditor Agreement were
made in 2006 . Since then the group has not performed according to expectations, with
the result that interest is now significantly in arrears. The group performance falls short of
various targets specified in the Senior Credit Agreement covering the Senior Debt
(principally the various financial covenant ratios based, directly or indirectly, on the
EBITDA earnings before interest, tax, depreciation and amortisation). Interest due to
the Senior and Mezzanine Lenders has not been paid, and the boards have considered
that it cannot be paid fully into the future either. The boards are concerned that they
cannot pay debts as they fall due, and that the group is balance sheet insolvent. The
group has sought to come to a restructuring arrangement with the Senior Lenders and,
for a time, with the Mezzanine Lenders. Negotiations have been in process for some
months. The plans involved the Senior Lenders giving up some of their debt in exchange
for equity, with the business of the group being transferred to a new corporate structure
containing new companies in order to achieve that. The new group would be principally
owned by the Senior Lenders; the existing group would not retain an interest. At one
stage of the negotiations there was a proposal to allow the Mezzanine Lenders to
participate in the form of share warrants, but that was abandoned and since then the
proposals that have been made have not included any new rights for the Mezzanine
Lenders.
7 The current proposals are embodied in the schemes of arrangement for which the
court's sanction is sought, coupled with other transactions to give effect to a partial debtequity swap. Its elements are as follows:
i) There will be a restructured group consisting of three companies HoldCo, MidCo (a
wholly-owned subsidiary of HoldCo) and NewCo (a wholly-owned subsidiary of MidCo)
and a transferee of certain German assets. The equity in HoldCo will ultimately be
owned by the Senior Lenders, subject to a certain amount of dilution in favour of
members of the management of the group.
ii) The Senior Debt will, to the extent necessary, be accelerated and demands for
payment will be made against the three scheme companies and certain other
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transferors.
iii) Following this sanction hearing, and conditional upon sanction being given, the
various transferor companies will be placed into administration and each of the
transferor companies (including the three scheme companies) will be requested by the
Security Agent under the present lending arrangements to enter into asset transfer
agreements to transfer all the assets from the present group into the restructured
group.
iv) 12m of the existing Senior Debt will remain in the existing group. A large part of
the rest (approximately 185m) will be novated to a company in the new group. The
remainder of the debt will be substituted by the Senior Lenders taking the shares in
HoldCo. The old group will be released from the debt other than the 12m being left
behind.
v) The transfer of assets to the new group will be done by an administrator. The
evidence when it came before me was somewhat coy as to the reason why the
administrator, rather than the various boards of directors, were effecting the transfer. It
transpired that this was because it was considered by the boards to be better to have
an insolvency practitioner, an independent third party, consider the transfer, and its
propriety at the relevant values. Even though the administration is to be a prepackaged administration, with the intended administrator being kept fully informed of
everything that is going on, there can, of course, be no guarantee that the
administrator will, at the end of the day, effect the various transfers. However, if the
transfers do not happen, then the rest of the overall transaction does not happen
either.
vi) The three schemes deal only with the mechanism of the release of the scheme
claims (the Senior Debt) in anticipation of the exchange for the shares in HoldCo and
the debt owed by the new group. The schemes do not themselves provide for the
transfer of assets. As was pointed out, it would technically have been possible to have
achieved the same result as that achieved by the schemes and the overall
arrangements without the necessity for a scheme of arrangement had all the Senior
Lenders been in agreement and participated. However, because a small minority does
not agree, a scheme becomes necessary.
vii) The overall restructuring still involves the use of the enforcement processes of the
Intercreditor Agreement , including the compulsory release of security and guarantees
held by the Mezzanine Lenders and the transfer of assets that that document enables.
The objections to the scheme in outline

8 That, then, is where the three schemes of arrangement fit into the restructuring
proposals. The overall effect is to transfer all the assets of the group into the new group
and to give the Senior Lenders the bulk of the equity in that new group (subject to the
small interest in favour of the management). A large part of its debt is novated. No assets
will be left in the group in order to pay the Mezzanine Lenders, who are thereby shut out.
Justification for that is said to be that the value of the group is such that the Mezzanine
Lenders (and any further subordinated lenders) have no economic interest in the group
because the value of the assets (or the value of the group as a whole) is significantly and
demonstrably less than the value of the Senior Debt.
9 On the basis of all that, the companies have propounded the schemes and propose to
compromise with only the Senior Lenders. They do not seek to enter into any compromise
with the Mezzanine Lenders. Accordingly, they are not party to these schemes, and they
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were not summoned to any class meeting. The case of the scheme companies, and of the
Senior Lenders, is that that is entirely appropriate in the circumstances. It is technically
not necessary to call a meeting of the Mezzanine Lenders if they are not to be party to the
schemes, and none of the companies has to promote a scheme as between itself and the
Mezzanine Lenders if it does not wish to do so. So far as the Mezzanine Lenders are
concerned, the key step is the transfer of the assets from the present group to the new
group. That is not affected by the scheme; it takes effect outside the schemes, albeit it is
conditional on the schemes' being sanctioned.
10 Many of the Mezzanine Lenders do not accept that the schemes should be sanctioned.
They have formed a Mezzanine Co-ordinating Committee (MCC) which has been
represented before me by Mr David Chivers QC. I can treat the MCC as being synonymous
with the Mezzanine Lenders for the purposes of this judgment. They say that the schemes
are unfair because they unfairly prejudice them. Their key point is that they do not accept
that the value of the group's assets is less than the value of the Senior Debt. They say
that the fair and reasonable thing to do would be to allow the Mezzanine Lenders to
participate in the new group by giving them an interest which gives the Senior Lenders
the first right to have their debt repaid, and a proper return for their equity, but which
does not absorb all the equity after those things have been done. Further, they say that
the Schemes should not be sanctioned because the overall arrangements shut out the
Mezzanine Lenders from any prospect of benefiting from the assets, and there are
sufficient prospects of their having an economic value in them as to lead to their not
being ignored in this way.
The supporters of the schemes before me

11 The Senior Lenders have formed a Senior Steering Committee (SSC) to propound
the interests of the Senior Lenders. Its representatives hold almost 60% of the Senior
Debt, and they were represented before me by Mr Gabriel Moss QC. The scheme
companies were represented by Mr Robin Dicker QC.
The valuation evidence

12 The scheme companies have procured, or engaged in, various valuation exercises, all
of which, if valid, show that the value of the group is very significantly less than the
uncontested, and uncontestable, value of the Senior Debt. In those exercises the group,
or its holding company, is sometimes identified as IMO, rather than Bluebrook. As long as
that is understood, the distinction does not matter. Those exercises were as follows.
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13 PricewaterhouseCoopers LLP (PwC) were instructed by the scheme companies and

the Bank of Scotland plc (as lead senior lender) to produce a report to analyse the value
of the group for the insolvency practitioner in waiting, that is to say the person who it
was intended to be the administrator in the pre-packaged administration that would
intervene if the restructuring took place. They were first instructed on 2nd March 2009
and carried out their first exercise as at 9th March 2009. They updated their report in
June. The report carried out a valuation of the group on various bases. It is clear that the
report valued the group on a going concern basis, and not on a liquidation or even a fire
sale basis. That is made clear from the summary of their instructions and their express
basis of valuation. The objective was to come up with a figure, or range of figures, for the
Business Realisation Proceeds, which they define as the amount that the business is
expected to realise in a sale at the current time. They adopted the following
methodologies:
i) An Income Approach. The Income Approach indicates Business Realisation Proceeds
based on the cash flow that the business can be expected to generate in the future.
This is a discounted cash flow (DCF) basis. In this approach they added an alpha
factor to the cost of capital to reflect uncertainty in the market and the impact of the
present credit crunch on the availability and cost of financing. It had the effect of
depressing the final valuation figure.
ii) A Market Approach. The Market Approach indicates Business Realisation Proceeds
based on a comparison of IMO to comparable publicly traded companies and an analysis
of statistics derived from transactions in its industry.
iii) A leveraged buy-out (LBO) analysis. .we have considered how a potential
private equity purchaser could look to fund a deal for IMO by performing a high-level
debt capacity analysis. We have then used this debt capacity to assess, to a LBO model,
the level of equity investment a private equity investor could be prepared to make,
given a typical required equity rate of return, in the current market.
14 The valuation exercises are conducted, where appropriate, on the basis of certain
assumptions for example an assumption of zero growth in the terminal year (for the
DCF calculation) and certain reasoned assumptions as to the Weighted Average Cost of
Capital (WACC). The assumptions are clearly articulated and the reasons for them are
clearly given. Having considered all these matters, and having set out the difficulties in
finding proper comparables on the basis of the approach to which they are relevant, the
valuation demonstrates the following ranges of estimated Business Realisation Proceeds:
i) Income Approach a range of 220m to 275m as at 9th March 2009. The range
reflects various sensitivities to which the transaction is subject. However, bearing in
mind the then current market conditions, it was thought a more reliable indication of
the top figure would be 250m. By June factors had caused them to raise one of the
multiples to which the transaction was subject, but nevertheless they came to the
conclusion that there was no change as at 3rd June 2009.
ii) On the Market Approach their estimate for Business Realisation Proceeds as at 9th
March was 220m to 250m. Because of the change in market and economic conditions
by 3rd June, as at that date they revised their estimate upwards to a range of 235m
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to 265m.
iii) As to the LBO analysis, it came up with a range of 227m to 256m. They did not
change this in considering the position as at 3rd June.
15 Accordingly, PwC estimate that a purchaser would pay a sum not exceeding 265m for
the business.
16 In considering a way forward, the directors instructed Rothschild to pursue a third
party sales process with a view to seeing if a buyer for the existing group could be
secured. Details of Rothschild's activities have been provided. They contacted a number of
potential financial buyers, and were in turn contacted by 12 additional potentially
interested parties. The process produced only one indicative offer which placed a value on
the enterprise of 150m to 188m on a cash and debt free basis. This was not considered
by the board to be an appropriate level of interest, or a worthwhile level of cash, to take
further.
17 The third valuation exercise involved instructing King Sturge LLP to value a number of
the group's sites, and then instructing PwC to extrapolate an overall value from the
valuation of those sites. The valuation resulting from this exercise was one of 164m on a
restricted sales basis (i.e. a swift sale without a full marketing campaign, the sort of thing
a mortgagee may be entitled to do) and 208m on a full market value basis.
18 It will be apparent from those three exercises that they all generate figures which fall
well short of the value of the Senior Debt (313m). Evidence was also given that even if
one strips out the alpha factor which PwC used, the value is still well short of the level
of the Senior Debt. Mr Dicker says that that is the conclusion that I should reach on
valuation. He says this is supported by the fact that the valuation of the Senior Debt in
the market is, even after the promulgation of the schemes, very significantly below par
currently around 60p in the pound.
The LEK report

19 In all the negotiations leading up to the schemes, the Mezzanine Lenders did not
produce their own valuation evidence in order to justify their stance. However, in the
course of these proceedings they have produced some evidence. It is a report from LEK
Consulting and is dated 1st July 2009. It carried out a DCF analysis and comes to the
conclusion that:
The IMO Car Wash business is extremely sound and profitable.
In paragraph 2.3 it criticises a market price valuation, on the footing that there is no liquid
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market for an asset such as the scheme companies. In those circumstances a market price
valuation is not an appropriate way of ascertaining the value of the group, especially in the
current economic circumstances. Criticisms are made of the Rothschild marketing exercise,
suggesting that any bids would be likely to be on a fire sale basis, that bids would be
affected by the difficulty of securing finance for the business and by the general current
economic circumstances and that the illiquid market would deter bids. A valuation method
based on comparables is said to suffer from an absence of proper comparables, and a break
up/liquidation valuation is inappropriate to a sale as a going concern. In the circumstances,
LEK consider that the most appropriate method of valuation for the group is a DCF analysis in
which the group is valued on an ongoing basis.
20 The report then goes on to indicate the fruits of such analysis. Any such analysis
requires a number of assumptions to be made. In PwC's analysis they set out those
assumptions. The LEK report does not set them out, and they were not provided until the
evidential stages of this hearing when it was pointed out that that material was absent
from the report. The report does not then go on to set out LEK's view of the value.
Instead, it undertakes a Monte Carlo simulation which involves repeated calculation of
the DCF valuation, using random sampling of input and assumptions, and then
aggregating the result into a distribution of the probabilities of different valuation
outcomes to show the relevant likelihood of this potential set of outcomes. The result is
a graph which is said to show that in each scenario a significant majority of outcomes
exceeds 320m. The conclusion is expressed that:
On this basis, it appears highly likely that the value of IMO breaks in the
Mezzanine tranches of IMO's current debt structure.
21 The report then carries out two other valuation exercises, one a comparable
transactions valuation and the other a comparable multiples valuation. The first, using
five precedent transactions as a basis for valuation, comes up with a valuation of about
330m. The second is used to provide an indicative valuation to provide further broad
support to the DCF method. LEK took five comparable public companies from an original
set of 12 adopted by Rothschild and PwC, plus another four. They were selected on the
basis of having similar characteristics to the group. Various data was extracted from those
companies and applied to figures for the group. From this (unreasoned and unsupported
in the report) LEK derive a valuation range whose lower end is in excess of 300m on
average, with a median valuation of circa 385m.
22 This report is the material relied on by the Mezzanine Lenders in support of their case
that they have an economic interest. There was no cross-examination of the author of this
report (or of the other reports).
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The principles
23 The broad principles on which I should act in determining the dispute between the
MCC on the one hand and the company and the SSC on the other were not seriously in
dispute, though each side emphasised different aspects. The principles appear in the
following paragraphs.
24 A company is free to select the creditors with whom it wishes to enter into an
arrangement and need not include creditors whose rights are not altered by the scheme.
This appears from Sea Assets Ltd v Pereroan etc Garuda Indonesia [2001] EWCA Civ
1869 and In re British & Commonwealth Holdings plc [1992] 1 WLR 672 . Prima facie,
therefore, the company is entitled to select the Senior Lenders as being those with whom
it wishes to enter into a scheme and not enter into a scheme with the Mezzanine Lenders
as well. Of course, whether that scheme can ultimately be effected, or will be sanctioned,
is another matter. At this stage the question is one of choice of counterparty.
25 Next, in promoting and entering into a scheme, it is not necessary for the company to
consult any class of creditors (or contributories) who are not affected, either because their
rights are untouched or because they have no economic interest in the company. This is
apparent from In re Tea Corporation Ltd [1904] 1 Ch 12, where the Court of Appeal held
that the dissent of ordinary shareholders would not stop a scheme being sanctioned,
because although those shareholders had a technical interest as shareholders, they in fact
had no economic interest in the company because the assets were insufficient to generate
a return to them in the liquidation that was then on foot. As Vaughan Williams LJ said (at
page 23):
It would be very unfortunate if a different view had to be taken, for if there were
ordinary shareholders who had really no interest in the company's assets, and a
scheme had been approved by the creditors, and all those were really interested
in the assets, the ordinary shareholders would be able to say that it should not
be carried into effect unless some terms were made with them.
If there is a dispute about this, then the court is entitled to ascertain whether a purported
class actually has an economic interest in a real, as opposed to a theoretical or merely
fanciful, sense, and act accordingly - see the reasoning in In re MyTravel Group plc [2005] 2
BCLC 123 at first instance. Where things have to be proved, the normal civil standard applies.
The same case indicates that the mere fact that the possibility of establishing a negotiating
position and extracting a benefit from a deal is not the same as having a real economic
interest (though obversely a real economic interest may establish, or enhance, a negotiating
position). The basis on which the assessment of that interest is to be carried out will vary
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from case to case.

26 The schemes do not involve the Mezzanine Lenders in the sense of engaging them as
parties. They will not bind them, and their legal rights are unaffected. The Mezzanine
Lenders therefore cannot, and do not, complain as persons whose legal rights are being
altered by the schemes in some unfair way. However, they are still entitled to object as
creditors on grounds of unfairness if the schemes unfairly affect them in ways other than
altering their strict rights. The court is exercising a discretion, and as a matter of principle
can consider unfairness in that sense, if it is made out. That is the essence of the case of
the Mezzanine Lenders.
The main case in favour of the schemes

27 The debate before me concerned the grounds of opposition of the MCC. Other
questions as to the general fairness of the schemes, and as to the propriety of sanctioning
them, were not fully dealt with and I do not propose to deal with that aspect here. Having
seen the schemes generally, nothing has yet struck me as to why I should not sanction
them if the complaints of, or raised by, the MCC do not stand in their way. The meetings
seem to have been properly convened and held, and appropriate majorities of those who
were summoned were obtained on the resolutions proposed. Although there was a small
number of dissentients, they have not sought to be represented before me. As far as I
can see, prima facie it would have been right for me to sanction the schemes if the MCC
had not objected. I will not formally determine that at this point, because Mr Dicker told
me that there were some minor points that he intended to draw to my attention at that
point but which were not dealt with during the course of the two and a half days of the
hearing before me (in the interests of saving time and focusing on the major issues).
However, I will address the points raised by the MCC on the assumed footing that, absent
those complaints, I would sanction the schemes.
28 The three scheme companies say that the Mezzanine Lenders cannot properly object
to the schemes. They are not formally bound by them, and their legal rights are
unaffected by them. In the light of the valuations of the assets that have been obtained,
the Mezzanine Lenders are not indirectly affected by them either because they have no
economic interest in the companies. They accept that if a proper case of de facto unfair
prejudice could be shown by the Mezzanine Lenders, or that there has been some other
impropriety which has led to unfairness, then that might be a ground for the court's not
sanctioning the schemes. However, the Mezzanine Lenders have not established any such
thing. The Senior Lenders support that stance.
29 The scheme companies and the Senior Lenders also developed points in answer to
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complaints of the Mezzanine Lenders. One particular point which was emphasised was
that the arrangements essentially gave effect to the subordination to which the Mezzanine
Lenders had been plainly and freely agreed. I will deal with those points (so far as
relevant) in the discussion and narrative that appears below.
The case put against the schemes in detail

30 The case put against the schemes developed during the course of Mr Chivers'
submissions. In outline it took the following form:
i) A proper view of the value of the companies (the intrinsic value) demonstrated that
there was a realistic possibility that they had a value which exceeded the Senior Debt,
so that the companies had a real value to the Mezzanine Lenders notwithstanding their
subordination.
ii) That value was being lost to them, because the assets were being stripped out for
the benefit of the Senior Lenders.
iii) The directors of the scheme companies had failed to comply with what was said to
be their obligation to extract a proper benefit for the creditors of the scheme companies
(other than the Senior Lenders), and in particular for the Mezzanine Lenders. There
were other courses of action open to them which did not involve joining these schemes,
or falling in with the wishes of the Senior Lenders, and they should at least have
considered, or possibly threatened, one or more of these. On the facts they had a
negotiating position which they could and should have exploited so as to extract some
benefit for the Mezzanine Lenders. They did not do so, and seem to have been adopting
a position of just looking at the position of the Senior Lenders.
iv) The scheme companies obtained no benefit from the schemes and the restructuring.
True it is that that debt was released, but in the circumstances that did not amount to a
benefit. Even if debt was released in excess of the value of the present value of
transferred assets, that was not a benefit because there was no benefit to an assetless
company in having a lower final debt than would otherwise be the case because it had
no assets to pay them anyway.
v) The 12m debt left in the companies was there as a blocker to make it more difficult
for the Mezzanine Lenders to make any claim against the companies or directors,
because that 12m would be absorbed by the Senior Lenders under their still existing
charge.
vi) Mr Chivers took a point, albeit only relatively faintly, that the schemes did not
amount to a compromise or arrangement within the meaning of section 899(1) of the
Companies Act 2006 .
vii) All in all the schemes were part of a restructuring that was unfair to the creditors of
the companies (other than the Senior Lenders) because of the benefits that it provided
to the Senior Lenders which were very likely to come about. The Senior Lenders were
not really taking any, or much, risk, and it was very likely that they would be rewarded.
31 Some of these points tend to inter-relate; some of them have to be considered
separately.
The state of the company

32 A large part of the Mezzanine Lenders's case depends on what the directors should
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have done, and various options open to the scheme companies when they started
considering the scheme. Accordingly it is necessary to consider what the financial state of
the group was or appeared to be.
33 The Senior Debt and the Mezzanine Debt arose in order to fund the acquisition of the
trading arm of the group in 2006, and to provide funds for capital expansion by 31st May
2009. 2008 was not a good year for the group, and its earnings fell significantly short of
its business plan. The first half of 2009 was better, in large measure because of the
strengthened euro against the pound. Nonetheless, in the second half of 2008 the boards
became concerned that the group would breach the financial covenants in the two major
credit agreements, which would give rise to events of default. Under the Senior Credit
Agreement an event of default entitles the Senior Lenders to call in the debt and declare
the security to be enforceable. The boards' fears were justified and certain ratios specified
in the two agreements were inadequate for compliance with those agreements. Since the
equity holders did not remedy them, they have become irremediable events of default
under both agreements. In addition, interest is now in arrears under both agreements the group failed to pay interest payments of 13.6m to the Senior Lenders, and 5.4m to
the Mezzanine Lenders, when payments were due on 31st March 2009. Further liabilities
of almost 1m are due to the Senior Lenders on hedging transactions. Various other
events of default have arisen.
34 The group is now balance sheet insolvent to the tune of over 300m, albeit after a
write-off of 360m of goodwill in the accounts. The goodwill that was written off appears
to be goodwill arising on the purchase of the group in 2006, being the excess of the
purchase price paid over the value of the net assets that were acquired. There was some
limited discussion as to the real significance of this insolvency arising as a result of the
write-off, and some criticism from the MCC as to correctness of the write-off (or whether
all of it should be written off), but the figures show that a write-off of anything over 35m
of that goodwill would still lead to balance sheet insolvency. While the group is meeting
its trading debts, it cannot pay all its debts as they fall due as is demonstrated by the
non-payment of interest, apart from anything else.
35 The group is still able to trade, and is capable of trading profitably on its trading
activities. The mere fact of technical defaults under the major loan agreements does not,
of itself, directly affect this. However, there is evidence of increasing difficulties on the
trading side too. Some credit insurance has been withdrawn for the UK and France, which
impacts on supplier confidence. Difficulties with suppliers are beginning to arise - I was
provided with evidence of difficulties in obtaining quotations for long term electricity
supplies.
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36 Because of a standstill arrangement with the Senior and Mezzanine Lenders and
subsequent forbearance of the former, the group has got sufficient cash reserves to meet
its immediate needs and trading liabilities. However, the board has come to the
conclusion that a restructuring of the business is required to secure its long term future.
Mr Russell, a director of the scheme companies, has said that the boards do not believe
that in the absence of restructuring, available cash resources will be sufficient to continue
to run the business as a going concern. His first witness statement said that if the present
proposed restructuring does not proceed, the boards may themselves have to take steps
to place the group in an insolvency procedure. A later paragraph was firmer - he
expressed the directors' view that in the absence of either the present or an alternative
restructuring, they will have to petition for some form of insolvency proceedings for
most, if not all the Existing Group companies in order to protect their assets because
enforcement of security would be likely to occur and the level of performance of the group
is such that the current level of debt has become unsustainable.
37 The view that a restructuring is required is shared by the SSC, and indeed by Mr
Douglas Evans, an officer of one of the Mezzanine Lenders who has responded to Mr
Russell's evidence. He has agreed that without an appropriate capital restructuring the
scheme companies will have a continuing difficulty in satisfying their financial covenants
and they need a capital restructuring which reduces the debt on the balance sheet to a
sustainable level and which resets the financial covenants. The MCC is said to recognise
that.
38 So there was no dispute between the protagonists before me that a restructuring was
required. The group cannot carry on as it is. However, I have had to set out some of the
background because, despite that shared view, the MCC has suggested that the board
should at least have threatened to carry on as things are. I will have to return to that
suggestion below.
The valuations revisited

39 Various valuations were in evidence. I have described them, and their general effect,
above. However, it is necessary to return to them in more detail because value is one of
the factors which lies at the heart of Mr Chivers' case. He says that the evidence shows
that there is real value in the companies in excess of the Senior Debt, or what the Senior
Lenders are paying under the proposed arrangements (in essence, the value of the Senior
Debt less 12m), or at least there is a realistic chance that there is such an excess (which
he says is enough for him) and the valuations demonstrate that it is likely that the Senior
Lenders will realise that value for themselves. Some of it should have been made
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available for the Mezzanine Lenders.

40 Mr Chivers spent a significant portion of his skeleton argument arguing in favour of a
going concern valuation as opposed to a liquidation valuation. I agree that, for the
purposes of this case, and in order to assess the fairness of the schemes, a going concern
value is appropriate, and indeed the scheme companies and the SSC did not contend
otherwise. The point has therefore been rendered academic, and is further rendered
academic by the fact that none of the valuations produced for the scheme companies is in
fact a liquidation valuation in the sense of a break-up valuation. All of the valuations seek
to answer the question of what a purchaser would be likely to pay now for the business,
and they adopt different techniques for that purpose. The Rothschild exercise was started
shortly after the end of March 2009 and ended on 29th May, the King Sturge report was
commissioned in May 2009, and the PwC report was commissioned in March 2009 (and
updated later).
41 Those do not, of course, show a valuation which is capable of generating value for the
Mezzanine Lenders. However, Mr Chivers relies on the LEK report as showing value for the
Mezzanine Lenders. He points out that there has been no cross-examination of any of the
valuers on the reports and says that in those circumstances I should treat the LEK report
as being at least a reasonable view which cannot be disregarded. That means that there
is a realistic view that there is value in the group over the value of the Senior Debt, which
gives the Mezzanine Lenders an economic interest in the group.
42 There was indeed no cross-examination of the valuers, so they have not been tested.
In the case of the LEK report the absence of cross-examination also means that, at least
to me, some of its methodology, and some inferences from it, remain obscure. However,
it does not follow that all of them are necessarily entitled to equal weight. I am entitled to
look at them and try to ascertain just what they are saying, in order to determine the
extent to which they assist in the relevant debate.
43 I have already observed that the three exercises conducted for the boards were
intended to derive a present value in the sense of the sort of money that a purchaser
would pay. They all have their drawbacks, but they are aimed to the same end. Where it
is necessary to make assumptions for the purposes of the exercises, those conducting
them tend to have made assumptions based on professional and expert judgments as to
which are appropriate in the circumstances (those judgments sometimes encompassing a
limited range). The LEK valuation is different. Its end result is a statistical analysis,
conducted by a computer, in order to assess the statistically most likely outputs for
variations in a range of inputs which can be quite wide. It does not involve the sort of
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judgments that a more traditional valuation requires. That is not to say that there is no
judgment at all involved. Judgment is involved in selecting the ranges. Mr Chivers
suggested that there was some judgment applied in selecting some weighting within the
range, but I confess that I cannot see that in any of the supporting evidential material.
Nor does it appear to be the understanding of Mr Merrett, a managing director of
Rothschilds who has considered the exercise on behalf of the scheme companies (judging
by paragraph 21 of his 3rd witness statement). In any event, judgment lies principally in
determining the extremes of the input ranges.
44 The result is what Mr Merrett, managing director of NM Rothschild & Sons Limited,
described as a robotic exercise. He said, and Mr Southern of LEK accepted, that using a
Monte Carlo simulation is not often used in valuation exercises. Its use is not unknown in
that context - it can be used in specialist circumstances such as a pharmaceuticals
company where underlying earnings are uncertain, or in oil companies where the
simulation can be used for estimating underground reserves. However, in Mr Merrett's
view that degree of uncertainty does not exist in this case, because there is a relatively
well-established business model. Mr Southern, of LEK, says that uncertainty is
demonstrated by the uncertainties arising out of the current economic environment, and
from the different attempts of the advisers to provide a value for IMO (being the company
where the value is considered to lie). That, however, seems to me to be a different sort of
uncertainty from that referred to by Mr Merrett. Any DCF valuation is going to have some
uncertainties in it - a number of assumptions have to be made as to the future. Yet it is
not suggested that a Monte Carlo technique is appropriate to every DCF calculation. Nor is
relevant uncertainty (making the technique applicable) demonstrated by the different
approaches, or results, of different valuers - that sort of uncertainty is inevitable where
professional judgment is involved.
45 The merits of a Monte Carlo technique are also said to lie in the fact that it produces a
range of values, rather than a single point value, and that is said to be appropriate where
single point certainty cannot be said to be achievable. I am sure that it is right that a
correct approach to valuation in many cases will be to specify a range. Unless the market
is tested, and a large number of purchasers all make the same offer, there will always be
something of a range. Indeed, the valuations obtained for the group suggested ranges.
However, the Monte Carlo technique seems to me to produce not so much a range of
values, professionally assessed, but a range of possibilities. From that one may be able to
get to a view as to a value, but that is where professional judgment comes in. The results
of the application of the technique are not necessarily irrelevant to a valuation exercise,
but they are not expressed as a value, and so are of limited use. They might be used as a
step towards valuation (when some more judgment has been applied) but they are not
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themselves a valuation. To some extent the drawbacks of the technique can be seen from
Mr Southern's own evidence. In his first witness statement he said that, if it is of interest
to examine a single point estimate, as opposed to a range, of value, then that is available
in the form of median and mean values shown (385m and 398m respectively). That is
plainly a mechanical, and not judgmental, assessment, and is highly technical. A proper
approach to valuation in a case such as this requires some real world judgments as to
what is likely to happen (such as a judgment as to the correct weighted average cost of
capital, which is a very important element in a DCF calculation), rather than a range to
which other ranges are applied in a series of random calculations to come up with some
mechanistic probability calculation. I find the former approach much more helpful and
much more relevant.
46 I confess that I also have misgivings as to the ultimate soundness of the LEK approach
from the manner in which it and the supporting material was provided. The Mezzanine
Lenders first disclosed that LEK were advising them on 1st June 2009, and their work at
that time was said to support the Mezzanine Lenders' view that the value of the company
breaks in the mezzanine debt. On 12th June they were asked by the scheme companies'
solicitors for a copy of valuation material relied on. Shortly thereafter the Senior Lenders'
solicitors proposed a discussion between LEK and PwC. The Mezzanine Lenders responded
on 21st June that they would let the solicitors know when they believed the meeting to be
appropriate. They never did that. On 2nd July the scheme companies' solicitors repeated
their request for the Mezzanine Lenders' valuation material, and the request was repeated
the next day in the light of the fact that it had by then become apparent that the
Mezzanine Lenders had received advice from LEK. The response was strange in the light
of the clear date of the report - the Mezzanine Lenders' solicitors said that it would be
provided on the date which the court had prescribed for the provision of the Mezzanine
Lenders' evidence (which was 10th July). It was provided with that evidence.
47 Having got the report, the companies' solicitors immediately asked for details of
supporting material so that the methodology could be understood. The report itself
merely states bald conclusions, without detailing the assumptions underlying it. On 14th
July the Mezzanine Lenders' solicitors responded:
The LEK report is based on underlying data taken from reports produced for
your clients and other information supplied by them. As it stands, the LEK report
- and more particularly the methodologies employed - is comprehensible.
That is a very unsatisfactory response. First, it was a very unhelpful response to a perfectly
reasonable request. The underlying assumptions are obviously needed if the worth of the
report is to be tested. Anyone who really wished their valuation evidence to be understood
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would have realised that and provided the material. Second (and flowing from the first) the
report itself might be regarded as comprehensible as a matter of English, but it would not be
fully comprehensible to a valuer in the sense in which a valuer would wish to comprehend it.
Again, I would have expected a professional to have realised that. Third, it turns out that the
first sentence is not wholly accurate. The underlying data came not only from material
emanating from the scheme companies or their valuation reports; it also came from other
sources. And anyway, without identifying it, the remark, even if true, is unhelpful. The letter
went on to purport to deal with some of the specific questions raised, but not adequately.
48 Eventually some more useful background material was provided when Mr Southern's
first witness statement was served on or shortly after its date (24th July 2009). However,
even then it turns out that the form of the information is a little strange in the
circumstances. It is described by him as the Appendix to the LEK report of 1st July. Yet
the report itself does not purport to contain an Appendix. No document is recorded in it as
containing the material on which it is based. The document produced is not an appendix
in the sense of being part of the original document, either by annexure or by crossreference. It is actually in the form of prints of slides in a Powerpoint presentation,
although a coversheet has been put on the print (as what is clearly an additional page)
which describes it as an appendix and dates it as at 1st July. Its very form and content is
that which is appropriate to Powerpoint slides and not to a technical appendix to a
technical valuation. Furthermore, there is a page of Disclaimers (page 1 of the pack of
slides), which constantly describes it as a Presentation and its purpose is Presentation
to the Mezzanine Syndicate dated 1st July 2009. So its genesis does not seem to have
been that of an appendix to the report. That is not to say that it cannot contain the
relevant information. It seems to do so (or at least Mr Dicker did not complain that it did
not). However, the whole story of the emergence of the report, and then the Appendix,
and the form that the Appendix takes, do not always sit entirely comfortably with the
idea that this is a valuable exercise conducted as being the best way of ascertaining the
intrinsic value of the group and in which the Mezzanine Lenders had confidence.
49 All in all, therefore, I do not give the LEK valuation as much weight as I give the other
exercises. As an exercise of assessing what a third party purchaser would pay it is very
unconvincing. One cannot assume that he would pay something in the high probability
range. Purchasers do not work like that. Subjective assessments are much more weighty
factors, and the scheme companies' exercises tend to reflect that better. The most that it
does in the present case is to give pause for thought on this point: Are the purchasers in
fact getting too a good deal (too much unfair value) because in the present market sales
are unlikely to take place, and when economic conditions change the same group will be
perceived to be more valuable, and the purchasers will ultimately reap the benefit of that?
This is not quite the way the case is put, but I can see that in some circumstances it
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might be. It is, I suppose, another analysis of the intrinsic value which is said to differ
from current market value.
50 Having paused for thought, I have come to the conclusion that this evidence is not
good enough to establish what the MCC seeks to establish in this case. I do not think that
it is a proper way of addressing that point. It is an attempt to play with the same sort of
assumptions that are used more conventionally in valuations such as the PwC valuation,
but in a more mechanistic way which avoids having to make real judgments in an area in
which judgments are very important. It does not, in my view, demonstrate with sufficient
clarity that market conditions are currently giving the Senior Lenders an unfairly good
deal. There are other ways of dealing with that sort of point. PwC's approach on their DCF
valuation builds in their alpha factor - a discount to reflect the fact that a purchaser will
pay less in the present market because of economic uncertainties. One can take that
factor out again if one wants, and if one does then one still gets a figure which is
significantly less than the value of the Senior Debt (as was demonstrated at the hearing).
51 Does the exercise nevertheless demonstrate that there is a realistic chance that the
value of the group is in excess of the value of the Senior Debt, which is one of the ways in
which Mr Chivers puts it? For these purposes, again I do not think that it does. It is too
technical an approach to engender much confidence. I do not consider that I can conclude
that, on a valuation basis, the Mezzanine Lenders are getting a raw deal because there is
a good or even reasonable case for saying that they are being deprived of value. The
evidence is not that strong.
52 I have considered this conclusion particularly carefully in the light of the manner in
which the evidence has been presented. There was no cross-examination on the valuation
evidence, so I must approach a rejection of the evidence with particular care. The
absence of cross-examination has meant that my understanding (particularly of the Monte
Carlo technique and the limits of its appropriateness) is more limited than it would have
been with the benefit of the sort of testing that comes from cross-examination. However,
I have to consider the evidence as it is presented to me. The scheme companies have
produced expert evidence which is comprehensible and relates to a real point how much
would a purchaser pay for the group now? The MCC has chosen to counter it with a
different type of evidence, which does not address that evidence but which seems to carry
out a much more theoretical exercise. I do not consider that it is successful in displacing
the companies' evidence (and indeed in some respects it does not seek to do so it seeks
to do something different), or in raising a sufficient possibility of there being some
unrealisable value in the group of which the Senior Lenders will be the unfair beneficiaries
if the restructuring goes ahead. This also applies to the two confirmatory exercises carried
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out by LEK (identified above) which featured very little in the MCC's case.
Breach of duty or other shortcomings on the part of the boards of the scheme companies
53 I have phrased the heading to this section to encapsulate the various ways in which Mr
Chivers sought to put his case. He did indeed at one stage put it as high as saying that
the boards were in breach of duty to the companies and their creditors, though at others
he seemed to be putting it somewhat lower in a sort of could and should have done
better by the Mezzanine Lenders and other creditors way, stopping short of a breach of
duty.
54 The first thing to note is the late stage at which the breach of duty allegation arose.
The point was not made at all in the evidence of the MCC in this case. It was not
complained of in pre-trial correspondence either. The only reference to duties was a
reminder in correspondence that certain duties were said to be owed, but that was in a
different context. On 10th June 2009 the MCC wrote to (inter alia) the directors of
Bluebrook and the SSC stating that it had been suggested that the directors were acting
in accordance with the instructions of the Senior Co-ordination Committee and pointing
out that if that were right then the shadow directors would owe the same duties as a de
iure director, in the course of which they would owe duties to have regard to the interests
of all creditors. All directors were urged to have regard to those duties. This was not a
letter complaining about a breach of duty, even though the MCC had known of the
restructuring plans for some time. Nor was it really aimed at the board directors as such.
Its primary aim was the alleged shadow directors. So this letter does not complain that
the directors are not actually fulfilling their duties in agreeing to the scheme. Even more
strikingly, the point was not really made in Mr Chivers' skeleton argument served shortly
before the hearing. The closest it got was the last sentence, which says that in looking
after the interests of the companies and their stakeholders the boards should be requiring
the Senior Lenders to pay a price for the significant benefits they got.
55 This is not just a forensic point devoid of practical consequences. There is a fairness
point, both in a general sense and in a way which has affected the conduct of the case. So
far as general fairness is concerned, it was a serious allegation to aim at the directors,
who were entitled to more notice of it, and a better formulation of it, than they were
given. Such allegations should not really be made on the hoof, and as a matter of
analytical convenience, as they were in this case. But more significantly for the purposes
of this case, its late emergence meant that the opportunity to have a proper evidential
consideration of the point has been lost. It was not disputed that the directors of an
insolvent company have to pay proper regard to the interests of the creditors. However,
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what that duty means in practice will be very fact-sensitive. Here the allegation was (or
became) that the discharge of that duty (or the duty to stakeholders, as the letter
referred to above put it) meant that the directors ought to have bargained for something
to be provided to the Mezzanine Lenders. The companies were forced to deal with the
point by looking for material scattered across witness statements which were intended to
deal with different points, and the directors did not have the opportunity of putting in a
clearly focused evidential rebuttal. This was less than satisfactory, though in the end the
position became clear enough. I shall deal below with the extent to which the scheme
companies did or did not have a bargaining position, but for present purposes will
concentrate on the question of who should have been doing the bargaining.
56 As I have just observed, there was no evidence from the companies which was
focussed on this point. However, such evidence as there is does not support the case that
the boards were under the duty alleged. No-one has suggested that those ranking below
the Mezzanine Lenders had any economic interest, and in any event I am told that there
were no other creditors of these holding and intermediate companies. That means that a
duty to have regard to the interests of the creditors other than the Senior Lenders means
a duty to act in that manner in relation to the Mezzanine Lenders. However, the
Mezzanine Lenders seem at all material times to have been fighting their own corner, and
in no way expected the directors to fight for them. They were a separate negotiating
party, trying to protect their own interests, and while that might not of itself in every case
absolve the directors from trying to take additional steps to protect them, in facts such as
the present it goes a very long way. Mr Russell's first witness statement gives a history of
the development of the schemes, and demonstrates that the companies negotiated with
both the Senior Lenders and the MCC. At paragraphs 76 to 79 he describes what he
believes to be negotiations between the SSC and the MCC to try to reach an
accommodation. There is not the faintest suggestion that the MCC was looking to the
boards to join in and assist. Those negotiations did not succeed. The boards had had
valuation material which suggested that the MCC did not have an economic interest, and
negotiated the scheme with the SSC. That material did not make it obvious that the
directors should be taking it upon themselves to negotiate an interest for a body of
creditors who had not managed themselves to negotiate an interest in direct negotiations.
They did not conduct those negotiations. I am not surprised; the directors were not
obliged to do so in those circumstances.
57 The position is even clearer when one considers the evidence from the MCC. Its first
witness statement comes from Snr Rafael Jesus Calvo Basarn. He describes the MCC as
being appointed to coordinate the Mezzanine Lenders' participation in the restructuring of
[the group]. The MCC is said to have continually highlighted that it sought to find a
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consensual solution that fairly reflects the Mezzanine Lenders' economic interests, and
that it remains committed to doing so. In other words, it is the negotiating party. Other
paragraphs describe direct dialogue between the SSC and the MCC. In his first witness
statement, Mr Douglas Evans, who has a lead responsibility in the MCC, provides details
of other dealings which the MCC has had, or sought to have. No reference is made to an
expectation that the boards of the scheme companies ought to be doing more. Any
complaints about a failure to agree, or a failure to deal, are made against the SSC.
58 All this is entirely inconsistent with the idea that the boards should have been
negotiating as the MCC now suggests. There is no evidence that the directors were ever
asked to do so, or ever had authority to do so, or could have ever have done so without
running the serious risk of treading on the MCC's negotiating toes. On the facts as they
appear from the evidence the duty in respect of which the Mezzanine Lenders are said to
have been in breach cannot realistically have existed, or at least not in any meaningful
sense. Coupled with the valuation evidence, the board would have been entitled to
conclude (if they had thought about it) that if the Mezzanine Lenders could not
themselves achieve anything, and in the absence of a request to do something, they (the
boards) were not obliged to start negotiating something else. Of course, there is no
evidence that the boards did think in that way, or indeed what, if anything, the board
thought about this aspect of the case, but that is because of the manner in which the
point was raised at the hearing, and its timing. I cannot draw any inferences or make any
other findings adverse to the directors in the light of those factors.
59 Nor is it clear what the directors ought to have, or could have, achieved in the
circumstances in which they found themselves. It does not seem that they had any
bargaining position. Mr Chivers sought to construct one. He relied on the following points
which he said should have been considered and deployed as appropriate by the board.
i) The situation was one in which enforcement was not in the interests of the Senior
Lenders because it would have been destructive of value. What was required was a
consensual disposition on a going concern basis (as is proposed under the schemes).
ii) The group had enough cash and cashflow to keep trading. It could do so profitably
and did not need the assistance of the Senior Lenders to do so (other than their
refraining from enforcement). The ability to generate cash did not depend on the Senior
Lenders.
iii) The cashflow evidence showed that it would be possible for the group to pay future
interest to the Senior Lenders, and even have some money for capital expansion,
though it would not be possible to pay the Mezzanine Lenders as well. The board had
discussed some sale and leaseback transactions to release cash. This sort of option
could be further considered to assist future trading.
iv) The Senior Lenders can be considered as having an asset with the enforcement
value of the asset. However, obtaining the full value of the going concern asset, in their
own hands, requires the co-operation of the companies. It can be delivered only on a
consensual basis.
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v) This gave the directors a bargaining position. They could, in the words of Mr Chivers,
have threatened to carry on trading. The Senior Lenders could only have stopped that
by enforcement action, which would not have been in their best interests. So the
directors had some cards in their hands.
60 This seems to me to be somewhat unreal. The group was, on any footing, technically
insolvent. That does not of itself inevitably require any particular course of action, but it is
a starting point for considering the impropriety of continued trading. Some difficulties had
arisen in the trading companies - see above. The companies could not, on any footing,
keep down further debt as it arose. The directors realised that there were problems, and
set about addressing them by engaging in discussions with the lenders. There were, as
the directors recognised, events of default under the major credit agreements. They had
valuations, none of which suggested that the Mezzanine Lenders had an economic interest
in the group. To say that in those circumstances the directors had some bargaining power
when discussing with the Senior Lenders is somewhat unrealistic. The directors properly
engaged the major creditors in discussions. To start bargaining in those circumstances is
odd. And for them to threaten to carry on trading on those circumstances, when they had
quite properly recognised a problem about that, would arguably have been to threaten to
engage in wrongful trading. There was actually a risk of further deterioration in the
position of the trading subsidiaries. Furthermore, Mr Evans has acknowledged in his own
evidence for the Mezzanine Lenders that the group would remain in difficulties in
complying with its financial covenants and a capital restructuring was required. In those
circumstances to say that the board had a negotiating position in that it could have
threatened to carry on trading is unreal and inaccurate.
61 This is not to say that the board had no negotiating position at all. It did not have to
do whatever the Senior Lenders wanted. But it was not in a position to bargain for some
additional return to other creditors if the Senior Lenders resisted that.
62 Mr Chivers sought to demonstrate, by reference to Mr Russell's witness statements,
that what the board was doing was giving effect to the wishes of the Senior Lenders. That
does not seem to me to be a fair reflection of the evidence. The passages relied on by Mr
Chivers show that there were initial discussions involving all the stakeholders (including,
for these purposes the Mezzanine Lenders), but when they came to naught the directors
then agreed the schemes with the Senior Lenders as being the only people whom they,
the directors, could see as having an economic interest in the company. This does not
amount to looking only to the interests of the Senior Lenders in some culpable way. It is
agreeing to a scheme which the Senior Lenders were prepared to agree to, in the belief
that the scheme could not affect the interests of anyone else (because of the size of the
debt and the value of the assets), in circumstances where the Mezzanine Lenders (looking
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after their own interests) had not been able to do a deal with the Senior Lenders, and in
circumstances in which the Senior Lenders were entitled to clear priority rights over the
Mezzanine Lenders. The companies' agreement to the scheme was in substance
acknowledging economic and business realities.
63 In this context I need to bear in mind the extent to which the boards could be seen to
be acting independently. The board of Bluebrook (which can be considered to be the
material one for these purposes) comprises 7 directors. 5 of them (including two nonexecutive directors) will be transferring to the new group once the restructuring is
completed. There is a bonus structure in place there which will give the directors
significant bonuses, including a bonus if interest arrears are recovered there. Their
independence might thought to be impeached, even though Mr Russell deposes to the fact
that the board has had independent professional advisers at all times. However, there are
two directors who are not transferring and who will not have any relationship with the
new group. All board decisions at the Bluebrook level have been unanimous, so those two
directors can be taken to have approved the restructuring. They are independent for
these purposes, so the schemes have had some independent scrutiny. It is true, as the
MCC observes, that there was no committee of independent directors set up to consider
the schemes, but the two to whom I have just referred can be taken to have brought an
independent judgment to bear. On the facts of this case that, in my view, is enough to
deal with any questions of lack of independence which might otherwise arise.
Other points said to go to unfairness

64 Mr Chivers pointed to other points which supported his allegation of unfairness or
which he said indicated that the schemes should not be approved.
65 He pointed to the 12m of senior debt being left behind in the existing group. He said
that this amounted to a hurdle left in the way of the Mezzanine Lenders should a
liquidator think about bringing proceedings against one of the professionals based on a
sale at an undervalue. The first 12m would still go to the Senior Lenders, so the
liquidator would have to be satisfied that the claim was worth more than that before he or
she thought it was worth bringing proceedings. It would, and was intended to, act as a
disincentive.
66 The Senior Lenders deny that that is its purpose. It is said by them, plausibly (albeit
on instructions, and not as a matter of evidence) that the 12m is left there just in case
there is some asset which, unforeseeably, comes in. It is there to enable the Senior
Lenders to pick it up - they would have been entitled to the benefit of it had it come in
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before the schemes. In the light of the overall picture I do not think that I should or can
find a sinister import in relation to this factor. In any event I do not understand how the
deterrence is said to work unfairly in the first place. The undervalue has to exceed the
amount paid by the Senior Lenders before the claim is worth thinking about. The Senior
Lenders will have paid 301m (treating the Senior Debt as being 313m). If the assets
are worth, say, 320m, generating an undervalue of 19m, then the first 12m goes to
the Senior Lenders anyway, leaving 7m for the Mezzanine Lenders. If the 12m had
been released and had not been left behind, then the Senior Lenders would have paid
313m. The claim is now worth 7m, which again goes to the Mezzanine Lenders. In
other words, a claim has to be worth something to the Mezzanine Lenders before it is
worth bringing, and that value to them is the same whether or not the 12m is left
outstanding. So that makes it look even less sinister.
67 Mr Chivers went on to point out that directors of an insolvent company do not owe
duties to particular sections of the creditors only, and that a board of an insolvent
company cannot insist that the business of a company should survive as a going concern
- a dominant intention to preserve the business is not a legitimate consideration. In
support of these propositions he cited Re Pantone 485 Ltd [2002] BCLC 266 and Sydlow
Pty Ltd v Melwren Pty Ltd (1994) 13 ACSR 144 . The first of those propositions is true, but
is irrelevant on the facts of this case. The directors of the scheme companies have not
sought to act in the interests of one section of creditors at the expense, or to the
detriment, of the creditors as a whole. They have entered into arrangements with the
section of secured creditors with priority over subordinated creditors who, on the facts as
known to them, would not have any interest in the assets because of their subordination.
That is entirely different from the situation where directors advance the cause of one
creditor at the expense of other creditors who thereby lose a benefit they would otherwise
have. The second proposition is also plainly true. Where a company is insolvent, then a
consideration of whether or not to try to preserve the business as a going concern or not
must be guided by what is in the interests of the creditors and not by reference to some
unconsidered dominant intention to do so, or some dominant consideration to do so in the
interests of some third party without an adequate claim. In Sydlow there was a finding
that the directors had sought to preserve a business not in the interests of the company,
but in the interests of a third party whose success they wished to promote. That caused
detriment to the company and its general body of creditors. Again, that is not a proper
analysis of the facts surrounding the present schemes. The directors were not promoting
the continuation of the group business as a going concern in the interests of the Senior
Lenders and at the expense of the Mezzanine Lenders. They were assisting in a disposal
on a going concern basis in the interests of the company, because it procured a greater
level of discharge of debt than would be the case on a break up or insolvency disposition,
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in favour of someone who was, in effect, the sole beneficial owner of the assets anyway
(because of the security and subordination position) and not at the expense of the
Mezzanine Lenders at all (because of the valuations and the absence of an economic
interest in the asset).
68 Accordingly Mr Chivers' follow-up submission fails too. He sought to deploy the
principles that he got from those two cases to attack what the explanatory memorandum
described as the objectives of the restructuring - to create a new corporate structure for
the business with an improved balance sheet, and to avoid the prospect of having to put
some group companies into administration or liquidation which, if had occurred, would
lead to less recovery for the Senior Lenders than would be the case under the schemes.
Since, on the figures (and in particular on the valuation figures which the companies had,
unchallenged at the time by any rival valuation from the Mezzanine Lenders) and on the
priority arrangements, the Senior Lenders were the only persons interested in the assets,
the objectives (shared by the Senior Lenders) were not impeachable on that basis.
69 Mr Chivers went on to seek to draw some applicable principles from Re Greenhaven
Motors Ltd [1999] BCC 463 . He relied on it as demonstrating what the court does when a
compromise is before it and it does not produce a benefit for the creditors. In that case
the court was asked to approve a compromise entered into by a liquidator. The company
had no assets. It sought to compromise a possession action brought against it, and a
counterclaim against the claimant, by agreeing, amongst other things, to give up the
counterclaim. The Court of Appeal said that compromise should not be sanctioned. At the
end of his judgment Chadwick LJ said:
The question for the court is whether a compromise which provides no
discernible benefits, but which just might do some harm to the creditors and
contributories, should be sanctioned. I am satisfied that that question should be
answered in the negative.
70 Mr Chivers submitted that this case established that when considering the situation
where a corporate entity is releasing its claims, in order to assess the benefit to the
company you have to look at the benefit to persons other than the creditor who is
compromising with the company. You cannot, he says, merely treat the release of a
debt against the company as amounting to corporate benefit; there had to be some
valuable consideration, and the court had to be satisfied that the value of the asset being
transferred is at least equal to the value of the asset being received. On the basis of the
evidence, the court could not be satisfied that the assets being transferred were equal to
the value of the outstanding Senior Debt.
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71 It was not wholly clear to me whether Mr Chivers was relying on this submission in
support of his proposition that the schemes could not amount to a compromise within
the meaning of the section (as to which see the next section of this judgment), or
whether this was a point going to discretion. So far as it was the former, it does not assist
him. The case did not decide that the transaction in that case was not a compromise; it
held that it was not a compromise which the court should sanction. So far as it raises
factors going to discretion, it is operating in a different environment. The function of a
court asked to sanction a compromise by a liquidator involves considering whether the
interests of those interested in the assets of the company in liquidation are best served by
letting the company enter into the compromise, or by not letting it enter into the
compromise. This is not the same exercise as a court conducts when considering a
scheme of arrangement under section 899 . The latter exercise has been set out in a
number of well-known authorities, and while the exercise may in some cases share some
elements with the liquidation compromise cases, the emphasis and overall issue is
different see for example the formulation by David Richards J in Re Telewest
Communications plc (No 2) [2005] 1 BCLC 772 at para 20. One only has to read that
formulation, and compare it with Chadwick LJ's summary in Greenhaven, to see why that
is the case.
Whether this is a compromise or arrangement

72 Section 899 of the Companies Act 2006 provides that parties may agree a
compromise or arrangement and the court may sanction the compromise or
arrangement. Mr Chivers submitted that the schemes did not fall within that wording. His
first point was that a compromise or arrangement involves an element of reciprocity of
benefit, and that in a situation in which one party gives up everything and gets nothing in
return then there is no compromise or arrangement. In support of this proposition he
relied on In re NFU Development Trust [1972] 1 WLR 1548 . In that case the scheme
provided that all existing members of a company apart from 5 gave up all rights in
respect of their shares, and that on a winding up all surplus assets were to be paid to
another body or company having the same objects, or to charity. Brightman J cited In re
Alabama, New Orleans Texas and Pacific Junction Railway [1891] 1 Ch 313 and went on
to say:
The word compromise implies some element of accommodation on each side. It
is not apt to describe a total surrender. A claimant who abandons his claim is not
compromising it. Similarly, I think that the word arrangement in this section
implies some element of give and take. Confiscation is not my idea of an
arrangement.
member
whose
rights
are
expropriated
without
any
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compensating advantage is not, in my view, having his rights rearranged in any

legitimate sense of that expression.
73 Mr Chivers sought to apply that to the present case.
74 It does not seem to me that it can be applicable. That was a case in which the
members were giving up their rights and getting nothing back in return. If the right (if
that is what it was) to have surplus assets transferred to another company might be
regarded as to some extent a right, Brightman J did not regard it as being one for these
purposes. The present schemes are nothing like that. The schemes release the scheme
claims, but it is part of an arrangement under which those claims are substituted by new
claims against the new group, and the assets of the existing group are to be transferred.
True it is that the scheme companies do not themselves promise to do much under the
scheme, but the schemes are part of a wider arrangement. The situation is really nothing
like that in the NFU case, where there was absolutely nothing passing back to the
members. It is right to describe the present schemes as being certainly arrangements,
and probably compromises as well. The present case is not a complete surrender.
75 Accordingly, the schemes within this case are, as a matter of jurisdiction, compromises
or arrangements within section 89 .
Other matters relied on by the companies and the Ssc

76 So far I have concentrated on the case of the MCC for saying that schemes are unfair
to the Mezzanine Lenders. The scheme companies and the SSC had their own points
which they relied on in support of their case that the schemes worked no unfairness
towards the Mezzanine Lenders. In many respects they were counterparts to, or answers
to, points made by the MCC, but I should deal with some of them.
77 Their combined cases relied on the following:
i) The scheme companies required restructuring. That was accepted by everyone,
including the MCC, apparently.
ii) The companies have obtained valuations of the business as a going concern, or have
conducted an exercise to see how much a going concern sale might realise (the
Rothschild exercise). Those valuations and exercises pointed to valuations which were
much less than the value of the Senior Debt. They were proper exercises, not
conducted on a break-up or even a fire-sale exercise (though the King Sturge exercise
came up with a figure for a quick sale as an alternative figure) and their results were
consistent in that the best figures fell well short of the Senior Debt.
iii) There were discussions which involved the MCC, and the SSC had been prepared to
allow the Mezzanine Lenders some participation in the new group on a nuisance basis,
but that has been withdrawn.
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iv) There was no obligation, given the valuations, to consider a scheme involving the
Mezzanine Lenders, who had no economic interest in the companies.
v) By the time the schemes were put in place, the Senior Lenders had decided to
propound schemes which conferred no benefit on the Mezzanine Lenders. They were
entitled to do that. The subordination arrangements left the Senior Lenders in a position
in which they could enforce their rights, and procure the release of any interests of the
Mezzanine Lenders which would technically stand in their way. What the restructuring
does is in essence to give effect to something which the Mezzanine Lenders are not in a
position to resist.
vi) The Senior Lenders could bring about an auction of the companies now, and
themselves bid up to the value of the senior debt without causing any additional
prejudice to themselves or the Mezzanine Lenders. Such a state of affairs would have
the same effect as the overall arrangements of which the schemes form part.
vii) The Mezzanine Lenders have a safeguard in the form of clause 12 of the
Intercreditor Agreement . If they really thought that the debts were being sold at an
undervalue, or at a price which gave the Senior Lenders a good prospect of a benefit in
the future which was unfair to the Mezzanine Lenders (because it deprived them of that
benefit) then they could buy out the Senior Lenders and do the restructuring
themselves, with the benefits which they claim to flow from the restructuring to the
Senior Lenders. They have chosen not to do so. They do not seem to want to run the
risk.
viii) The Senior Lenders were not just helping themselves to assets with a value in
excess of their debt. They were not fully enforcing at this stage (in the sense of having
the assets sold and applied to reduce their debt). They are leaving debt outstanding
and turning debt in to equity, so as to allow trading to continue. They were taking a
risk, which was a genuine risk in that it might not work and which might leave them
worse off at the end of the day. The affairs of the new group might not flourish, and
they will bear the risk of that.
ix) Absent these schemes, enforcement is a very serious possibility, if not an
inevitability. It is no answer to say, as Mr Evans does, that enforcement is not
inevitable because a deal can be done with Mezzanine Lenders. There is no certainty of
a deal, and the deal that has been proposed by them (see below) is unattractive.
x) The overall arrangements provide an additional safeguard in that an administrator
has to be satisfied that the deal is appropriate on the figures.
xi) There is no realistic alternative to the arrangements (and therefore the scheme)
other than a full-blown enforcement, which it is common ground will not see the Senior
Lenders paid out completely. Under a Lock-Up agreement 85% of the Senior Lenders
(by value), and the companies, have signed up to this, and no other, restructuring, and
have opposed any alternative to the schemes.
xii) The arrangements and the schemes are to the benefit of the companies because a
lot more debt is being written off than the value of the assets which are being
transferred.
78 I accept all those points, and do not need to elaborate on most of them. However, one
or two of them should be dealt with.
79 The Senior Lenders have decided to run a risk, which is a real one in the
circumstances. If the business does not succeed, then they may end up being worse off
than they are now. If it does succeed, then they will be better off. It is their decision to
run that risk, and neither outcome is certain. It is to be assumed that the Senior Lenders
think it is more likely that they will succeed than that they will fail otherwise they would
not enter into the overall arrangements. But there is nonetheless a risk, and it is a real
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risk to them. It is a risk that the Mezzanine Lenders are not prepared to run themselves
they are not prepared to buy out the senior debt and take over the arrangement. Their
response is to say that they should have a slice of the benefit after the Senior Lenders
have had a proper return. Their most recent proposals allow the Mezzanine Lenders a
return when the Senior Lenders have had an additional return of 19% over 3 years. Mr
Dicker submitted that that was not much better than putting the money into a savings
account, and there is something to be said for his point. It does not strike me that that is
a very handsome return for the risks being undertaken, though I received no evidence
about that. However, I cannot make a real finding about it, which illustrates another of
the difficulties about the MCC's approach. They say that I should refuse to sanction the
schemes, leaving the parties to negotiate again so that the MCC can seek to agree
another deal, and that that is a sensible and legitimate aim. But it does not seem very
sensible to me. How am I to know that the MCC will not make unreasonable demands? If
it matters, how is the reasonableness of those demands to be measured in the present
circumstances? How can I be at all confident that there would not be a full enforcement
(which the Mezzanine Lenders could not oppose) with a loss of value to the Senior
Lenders and no return at all to the Mezzanine Lenders? The fact is that I cannot. Refusing
to sanction the scheme in order to throw the parties into a further negotiation is not a
legitimate or sensible use of the court's power. I have to judge the schemes as they are,
on their merits, and either sanction them or refuse to sanction them. If I do the latter, the
parties will have to take their own course in relation to future negotiations or future
tactics, but that will be the result of a refusal to sanction on grounds other than a wish to
generate a further negotiation.
Conclusion
80 In the light of my findings and determinations above, then as between the scheme
companies and the Senior Lenders on the one hand, and the MCC and the Mezzanine
Lenders on the other, it seems to me to be right to sanction the schemes, (or at least not
to refuse to sanction them) and I so find. The Mezzanine Lenders are not bound by the
schemes, and therefore their legal rights are unaffected. So far as it is said that in the
circumstances the schemes are part of an overall arrangement which works unfairly to
them, I find that they do not. I do not consider they have a relevant economic interest in
the scheme companies.
81 In these circumstances I will go on to consider the remaining matters which have to be
considered in order to decide whether or not to sanction the schemes.
Crown copyright
2014 Sweet & Maxwell
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In The Matter of Bluebrook LTD in The Matter of IMO (UK) LTD in The Matter of Spirecove LTD in The Matter of The Companies Act 2006

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In The Matter of Bluebrook LTD in The Matter of IMO (UK) LTD in The Matter of Spirecove LTD in The Matter of The Companies Act 2006

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In The Matter of Bluebrook Ltd

[2009] EWHC 2114 (Ch)

The objections to the scheme in outline

The supporters of the schemes before me

The valuation evidence

13 PricewaterhouseCoopers LLP (PwC) were instructed by the scheme companies and

The LEK report

from case to case.

The main case in favour of the schemes

The case put against the schemes in detail

The state of the company

The valuations revisited

available for the Mezzanine Lenders.

Other points said to go to unfairness

Whether this is a compromise or arrangement

compensating advantage is not, in my view, having his rights rearranged in any

Other matters relied on by the companies and the Ssc

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