Junior Creditors Suffer Setback at the Carwash: U.K. High Court Approves IMO Carwash Group Scheme, Wiping Out IMO’s Senior Debt Without Junior Creditors’ Approval

On August 11, 2009, the United Kingdom High Court of Justice, Chancery Division, approved the terms of related restructuring schemes in which the bankrupt IMO (UK) Ltd. (IMO), the world’s largest dedicated carwash company, would release its senior debt, subject to a subsequent transfer of its assets to certain new companies.  Because a group of IMO’s junior creditors, the mezzanine lenders, did not join the schemes prior to their approval, the court’s ruling effectively granted control of IMO to senior lenders, the holders of the senior debt and, in the process, shut out the mezzanine lenders and any potential for them to challenge the fairness of the schemes.  The court also confirmed that a U.K. company has discretion to determine the creditors with whom it wishes to enter into a debt restructuring arrangement and need not include creditors whose economic interests will not be affected by that arrangement.  We discuss the factual background of the action, the mezzanine lenders’ argument and the High Court’s legal analysis.

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