Dow Jones Newswires | A Canadian judge explained her reasons for
approving Smurfit-Stone Container Corp.’s reorganization plan, leaving
it to a U.S. bankruptcy judge to make the final ruling on whether the
box-maker is free to emerge from Chapter 11 protection.

Justice Sarah Pepall of the Ontario Superior Court of Justice said
Smurfit-Stone’s scheme of arrangement was fair and reasonable, and had
votes of support from most creditors of the company’s Canadian units,
according to a copy of her ruling filed with the U.S. bankruptcy court.

Pepall’s decision is a necessary first step for Smurfit-Stone, which conditioned its Chapter 11 exit strategy on getting both U.S. and Canadian courts to endorse a restructuring that shakes off shareholders and uses equity to pay down debt.

The company is awaiting a decision from Judge Brendan Shannon of the U.S. Bankruptcy Court in Wilmington, Del., who presided over a lengthy confirmation contest that pitted the company against its shareholders.

Shareholders say they’re being cheated in the restructuring, and argue the company is worth more than it cares to admit.

Smurfit-Stone says it had to drastically refashion itself to survive. While there are signs of improvement in the container industry, Smurfit-Stone says, those indicators aren’t enough to support a Chapter 11 outcome that would leave value in the hands of equity stakeholders.

Pepall noted that Smurfit-Stone’s Chapter 11 exit financing, a $1.85 billion package of loans, is set to expire in mid-July, if the company isn’t clear of bankruptcy by then.

The plan calls for holders of $970 million worth of secured loans to be paid off with cash or new loans, while creditors owed $2.9 billion take over Smurfit-Stone.

Creditors of the Chicago company’s Canadian units are getting about $38 million in cash, for a recovery of from 29% to 84% of what they are owed. The plan preserves about 2,000 of the 2,500 Canadian jobs that were put on the line when Smurfit-Stone ran into trouble, Pepall said.

The company took cover from creditors in the U.S. and Canada in January 2009, blaming the recession and slowed consumer spending for denting demand for its products.

Pepall stayed her decision to give creditors of one of the Canadian companies, Stone Container Finance Co. of Canada II, a chance to overturn an adverse ruling. Owed $200 million, the “Finance II” investors voted against Smurfit-Stone’s plan, and battled it in both the U.S. and Canadian courts.

Pepall ruled against them, and was supported by a higher court, but the Finance II bondholders have asked for a hearing in the Supreme Court of Canada.