Ocean Rig Udw Incorporated, Drill Rigs Holdings Incorporated, Drillships Financing Holdings Incorporated and Drillships Ocean Ventures Incorporated (Each in Provisional Liquidation)

• Jurisdiction: Cayman Islands
• Judge: (Parker, J.)
• Judgment Date: 18 September 2017
• Court: Grand Court (Cayman Islands)
• Date: 18 September 2017

Grand Court, Financial Services Division

(Parker, J.)

IN THE MATTER OF OCEAN RIG UDW INCORPORATED, DRILL RIGS HOLDINGS INCORPORATED, DRILLSHIPS FINANCING HOLDINGS INCORPORATED and DRILLSHIPS OCEAN VENTURES INCORPORATED (each in provisional liquidation)

D. Bayfield, Q.C., C. Moran, S. Arman, N. Herrod, C. La-Roda Thomas and G. Boos for the scheme companies;

R. Reynolds and W. Jones for the joint provisional liquidators;

M. Todd, Q.C., S. Leontsinis and H. Froude for Highland Capital Management Ltd.;

A. Zacaroli, Q.C., T. Heaver-Wren, D. Bulley and J. Snead for the ad hoc group of supporting creditors;

M. Goodman and H. Khanbhai for Archview Inv. Group LP, Brigade Capital Management LP, Hof Hooreneman Banklers NV and Caspian Capital LP;

B. Hobden for the 2019 notes trustees.

Cases cited:

(1) Alabama, New Orleans, Texas & Pacific Junction Ry. Co., In re, [1891] 1 Ch. 213, referred to.

(2) Altitude Scaffolding Ltd., In re, [2006] EWHC 1401 (Ch); [2006] BCC 904; [2007] 1 BCLC 199, referred to.

(3) Apcoa Parking Holdings GmbH, In re, [2014] EWHC 3849 (Ch); [2015] 4 All E.R. 572; [2016] 1 All E.R. (Comm) 30; [2015] Bus. L.R. 374; [2015] BCC 142; [2015] 2 BCLC 659, dicta of Hildyard, J. applied.

(4) Chevron (Sydney) Ltd., In re, [1963] V.R. 249, dicta of Adam, J. considered.

(5) Dee Valley Group plc, In re, [2017] EWHC 184 (Ch); [2017] 3 W.L.R. 767; [2017] 2 BCLC 328, referred to.

(6) English, Scottish & Australian Chartered Bank, In re, [1893] 3 Ch. 385, dicta of Lindley, L.J. considered.

(7) Equitable Life Assur. Soc., In re, [2002] EWHC 140 (Ch); [2002] BCC 319; [2002] 2 BCLC 510, dicta of Lloyd, J. considered.

(8) Hawk Ins. Co. Ltd., In re, [2001] EWCA Civ 241; [2001] 2 BCLC 480; [2002] BCC 300, considered.

(9) Indah Kiat Intl. Fin. Co. BV, In re, [2016] EWHC 246 (Ch); [2016] BCC 418, referred to.

(10) Kempe v. Ambassador Ins. Co., [1998] 1 W.L.R. 271; [1998] 1 BCLC 234; [1998] BCC 311, referred to.

(11) Metinvest BV, In re, [2017] EWHC 178 (Ch), referred to.

(12) Nordic Bank plc v. International Harvester Australia Ltd., [1983] 2 V.R. 298, followed.

(13) Puma Brandenburg Ltd. v. Aralon Res. & Inv. Co. Ltd., 2017 GLR 127, referred to.

(14) Sea Assets Ltd. v. Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia, [2001] EWCA Civ 1696, referred to.

(15) Sovereign Life Assur. Co. v. Dodd, [1892] 2 Q.B. 573; [1891–4] All E.R. Rep. 246, applied.

(16) Telewest Comms. plc (No. 1), In re, [2004] EWHC 924 (Ch); [2004] BCC 342; [2005] 1 BCLC 752; on appeal, [2004] EWCA Civ 728; [2005] BCC 29, followed.

(17) UDL Argos Engr. & Heavy Indus. Co. Ltd. v. Li Oi Lin (2001), 4 HKCFAR 358; [2002] 1 HKC 172; [2001] HKCU 1184; [2001] HKCFA 19, followed.

Legislation construed:

Companies Law (2016 Revision), s.86(1): The relevant terms of this sub-section are set out at para. 40.

s.86(2): The relevant terms of this sub-section are set out at para. 84.

Practice Direction cited:

Practice Direction No. 2/2010, Schemes of Arrangement and Compromise Under Section 86 of the Companies Law.

Companies — arrangements and reconstructions — classes of members or creditors — when determining whether to order single meeting of creditors pursuant to Companies Law (2016 Revision), s.86(1), court to consider whether creditors’ rights against company so dissimilar that cannot consult together with view to common interest — rights against third parties irrelevant

Companies — arrangements and reconstructions — confirmation by court — court has discretion to sanction scheme of arrangement pursuant to Companies Law (2016 Revision), s.86(2) — court to consider (a) whether formalities satisfied; (b) whether, at scheme meeting, class or classes of scheme creditor fairly represented and majority acted bona fide; and (c) whether intelligent and honest scheme creditor might reasonably approve of scheme — court to be slow to depart from majority vote as creditors best judges of own commercial interests

Companies applied to the court to convene creditor meetings to consider proposed schemes of arrangement and for the sanction of the proposed schemes.

The scheme companies, UDW, a Cayman Islands incorporated company, and three directly owned Marshall Islands subsidiaries (known as “the silo companies”), were in provisional liquidation. They were members of the Ocean Rig Group which was publicly listed on the NASDAQ. The group was in severe financial distress resulting from a lengthy depression in the oil and gas markets that had rendered it unable to service its very substantial debt. Joint provisional liquidators (“the JPLs”) had been appointed and the court had determined that each of the scheme companies was insolvent or likely to become insolvent.

The scheme companies promoted four separate interlinked schemes of arrangement with their largest financial creditors to compromise over US$3.69 bn. of debt and return the group to solvency. The creditors who fell to be dealt with by the UDW scheme included persons having guarantee claims against UDW and the holders of unsecured notes due in 2019 (known as “the 2019 noteholders”). The 2019 notes were unsecured, structurally subordinated at the bottom of the capital structure and represented a very small proportion (approximately 4%) of UDW’s (and the group’s) indebtedness.

The schemes proposed, in essence, that the group’s debt would be exchanged for a mixture of (mostly) equity, a smaller debt burden and cash. Any claims of UDW or its subsidiaries against third parties were to be preserved by way of a preserved claims trust (“the PCT”). The vast majority of the value of the group was in the silo companies. The schemes were overwhelmingly supported by the scheme creditors, more than 90% of whom had agreed to a restructuring support agreement to vote in favour of the schemes. If the restructuring failed, the scheme companies would go into liquidation and there would be a group-wide insolvency. UDW would realize no value from its ownership of the silo companies, whereas on the proposed restructuring UDW would have a substantial going concern value. The estimated recovery for scheme creditors under the schemes was appreciably higher than the estimated recovery on a liquidation. Each of the four companies sought to convene a single class meeting of its scheme creditors to consider and, if thought fit, approve the schemes.

There was no objection to the proposal that there should be a single class for each of the silo companies. However, funds managed by Highland Capital Management LP (“Highland”) opposed the UDW scheme. Highland held 56.5% of the outstanding 2019 notes issued by UDW and was an unsecured creditor of UDW in the sum of $74,122,000 (approximately 2% of the total amount of the claims of UDW’s scheme creditors). Highland alleged that UDW and/or certain of its subsidiaries had improperly or fraudulently transferred property to related third parties and that such transactions should be set aside under New York law. It complained that the UDW scheme would prevent it from bringing such a claim and considered the PCT to be an inadequate and unfair replacement.

Highland submitted that a single class for the UDW meeting was inappropriate inter alia because (a) the 2019 noteholders and the UDW guarantee creditors had different rights as against the company such that they should be treated as separate classes of creditor, as the latter’s debts were secured and guaranteed by UDW; (b) it had been excluded from the commercial negotiations giving rise to the UDW scheme; (c) a proposal that it had put forward had been rejected without good reason; and (d) the UDW guarantee scheme creditors had significant and unfair advantages.

The court ordered single class meetings for all four companies. Turnout was high and the creditors voted overwhelmingly in favour of the schemes. The silo companies’ schemes were unanimously approved and only Highland objected to the UDW scheme. Of the 330 UDW scheme creditors who voted in favour of the scheme, 8 had no interest in the silo schemes (those creditors could be fairly said to be in the same position as Highland).

The court was then asked to sanction the schemes under s.86(2) of the Companies Law (2016 Revision).

Highland objected to the sanctioning of the UDW scheme. It sought an amendment of the scheme to give effect to its suggested modification (to preserve Highland’s status as a creditor and thus capable of pursuing its complaint), its exclusion from the scheme or a refusal to sanction the scheme on the ground that it was unfair. It was submitted inter alia that (a) the guarantee creditors had a collateral motive to vote in favour of the UDW scheme so as to obtain substantial benefits from the silo schemes; (b) the UDW guarantee creditors would receive payments to obtain their support for the scheme which had not been made available to all UDW scheme creditors and therefore had rights and interests manifestly at odds with the UDW scheme creditors as a whole and could not be said fairly to represent the class; and (c) there had been no meaningful vote and no intention to consider the merits of the scheme or Highland’s proposal.

Held, ruling as follows:

(1) A single meeting of creditors in each scheme was convened for the purposes of considering and, if thought fit, approving each of the four schemes for the following reasons. Highland’s rights against UDW were not so dissimilar from those of the other creditors as to make it impossible for them to consult together with a view to their common interest. A separate class consisting of the 2019 noteholders would not be justified. When comparing the rights that would be released under a scheme and the rights given to creditors pursuant to a scheme, regard should be had to the liquidation comparator were the group to become insolvent. Whilst insolvency, being a worst-case scenario, should not be used as a solvent for all class differences, it could be helpful in assessing whether there...