Case Summary: Sunbird Scheme Sanctioned

On 16 December 2020, Justice Snowden sanctioned Sunbird Business Services Limited's (“Sunbird”) Scheme of Arrangement having previously reserved his decision to allow the company to provide written submissions in response to points raised by a dissenting creditor during the Sanction Hearing. 

Background

On 28 October 2020, Snowden J ordered a single creditors’ meeting for Sunbird’s creditors to vote on its proposed Scheme of Arrangement which was on near identical terms to one that he had previously refused to sanction due to a lack of information provided to certain creditors. 

At the creditors’ meeting on 20 November, 24 of the 32 creditors approved the Scheme representing a majority of 80% in number and 86% in value. The dissenting creditors had not brought up any issues during the creditors’ meeting but their legal representatives, Shoosmiths, wrote a letter to the company challenging the Scheme on the basis of fairness and an alleged deficiency of information.

Shoosmiths did not appear at the Sanction Hearing but one of the dissenting creditors, Rupinder Bains, did appear and alleged that:

• there were material errors in the information provided to creditors;
• the insolvency analysis was incomplete;
• certain operating businesses could be sold as a going concern which would cover what is owed to creditors;
• there was no evidence that the Scheme would achieve its purpose;
• the rights issue would not raise enough cash to allow the company to extinguish its current liabilities; and
• the creditors had been misled as to the assets available after the restructuring.

There was no time for the company’s counsel to respond to these points therefore Snowden J accepted the suggestion that responses be submitted in writing.

The Sanction Decision

Following the written submissions provided by Andrew Thornton QC, counsel for Sunbird, on 7 December, Snowden J handed down his judgment on 16 December. 

In relation to Mr Bains’ assertions, Snowden J found that:

• the company’s omission regarding the interests that certain creditors would have in the company’s shares following the rights issue did not amount to a failure to disclose the interests of directors contrary to s897 CA 2006 and that such omission would not have had a material impact on the decision of the creditors;
• certain errors and inconsistencies in the financial information, while “manifestly unsatisfactory” would not have been material to the creditors’ decision;
• the insolvency analysis contained “inevitable defects” as a result of it being based upon the information provided by the company without independent verification;
• Mr Bains failed to satisfy him that the material relating to the operating businesses which Mr Bains asserted could have been sold to cover creditor debts was obviously incomplete or materially inaccurate;
• he could not conclude that there was a material misstatement or omission in the material provided to creditors;
• while certain information in the documents was inaccurate, it is likely that the creditors would have understood that information correctly;
• nothing in the Scheme documents led him to think that “the US$3 million to be raised by the Rights Issue is manifestly inadequate, such that an intelligent Scheme Creditor could not honestly hold the opinion that taking a calculated risk on the Scheme and Rights Issue would be in its interests” and
• not all of Mr Bains’ assertions relating to the financial information were well-founded.

As a result, Snowden J did not consider that he had any sufficient justification to differ from the outcome of the creditor meeting.

The judgment went on to refer to Snowden J’s refusal to sanction the first Scheme proposed by Sunbird which he said failed due to “the manifest deficiencies in the information provided to Scheme Creditors”. He found that this time, the financial information was “substantially better” but “still very far from perfect” and that “in several potentially material respects, it is inaccurate and unreliable”. He said that this was due to deficiencies in the company’s accounting records and as a result of the haste with which the Scheme documents were produced.

He said that such defects in the financial information “might, in another case, have led me seriously to doubt whether it would be appropriate to sanction the Scheme” because “the requirement for accuracy and completeness of the documents explaining a scheme to creditors is an essential safeguard for all creditors under Part 26 CA 2006”. However, he said that the court must take a practical approach if a Scheme is to be a useful tool to small and medium-sized companies who are legitimately seeking a restructuring but whose financial affairs may not be entirely in order. He referred to the Practice Statement on Schemes of Arrangement which provides that statements “should be in a form and style appropriate to the circumstances of the case”. He also noted that “perfection is not always attainable”.

He added that it also cannot be an absolute requirement that the financial information must have been audited or been subject to a full independent review and that “each case will turn on its own facts”.

He found that the question for the court in determining whether to sanction a Scheme is whether any defects in the scheme documentation would be likely to make any difference to the Scheme creditors. In this case, he concluded that they did not based on two factors:

1. This was the second time Sunbird had sought essentially the same Scheme for the same creditors. The creditors were therefore aware of the fact that the Scheme failed the first time due to inadequate information and this should have alerted them to the need to scrutinise the documents. The creditors were also told that the providers of the independent insolvency analysis did not accept any responsibility for its contents. Further, certain creditors which had entered lock up arrangements had been released. Finally, the Scheme was, for a second time, approved by the same majority of creditors who are sophisticated investors and such majority includes those who are not connected to the Board and do not hold shares in the company.
2. The opposing creditors had been “prepared to lock horns” with the company both in relation to sanctioning the original Scheme and at the Convening Hearing for the new Scheme, however, they did not raise their points of opposition with the other creditors and instead tried to persuade the court to decide how the other creditors might have responded to their points. Snowden J found that this diminished the force of the opposing creditors’ points as to the adequacy of information provided.

As a result, Snowden J was satisfied it would be appropriate for him to sanction the Scheme of Arrangement, notwithstanding the defects with the information in the Scheme documents.