Norton Rose Fulbright recently advised a syndicate of lenders to DeepOcean Group Holding B.V., a leading provider of subsea services for the oil and gas and renewables industries, on its successful restructuring via inter-conditional Restructuring Plans (under the new Part 26A of the UK Companies Act 2006). In the Q4 2020 Issue of our International Restructuring Newswire, our partner Mark Craggs wrote on the UK's new Part 26A – see "Lighting up the CIGA." With DeepOcean, we now have the first ever use of the cross-class cram down under CIGA, representing what has been described as arguably the most significant development in English restructuring law since schemes of arrangement were introduced in 1870. Mr. Justice Trower sanctioned the Restructuring Plans on 13 January 2021.
The Restructuring Plans and the cross-class cram down mechanism was introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020. The basic purpose of Part 26A (Restructuring Plans) is described in the Explanatory Notes to the legislation and its comparison to schemes of arrangement (under Part 26 of the Companies Act 2006) which reads as follows (with emphasis added):
"These provisions will allow struggling companies, or their creditors or members, to propose a new restructuring plan between the company and creditors and members. The measures will introduce a "cross-class cram down" feature that will allow dissenting classes of creditors or members to be bound to a restructuring plan. This means that classes of creditors or members who vote against a proposal, but who would be no worse off under the restructuring plan than they would be in the most likely outcome were the restructuring plan not to be agreed cannot prevent it from proceeding.
These provisions introduce a new Part 26A into the Companies Act 2006: Arrangements and Reconstructions for Companies in Financial Difficulty (a "restructuring plan"). The new Part represents the culmination of the policy work undertaken since a restructuring plan procedure for companies was consulted on as part of "A Review of the Corporate Insolvency Framework", published in May 2016.
In schemes of arrangement creditors (and sometimes members) are divided into classes (based on the similarity of their rights, which may vary significantly across a company's creditor base) and each class must vote on the proposed scheme. If all classes vote in favour of the scheme (requiring 75% by value and a majority by number of each class), the court must then decide whether to sanction it. Not all creditors or members of a company need to be included within a scheme. A company may propose a scheme in such a way as to exclude some creditors or members from it. Those creditors or members who are not bound by the scheme retain their existing rights.
The new restructuring plan procedure is intended to broadly follow the process for approving a scheme of arrangement (approval by creditors and sanction by the court), but it will additionally include the ability for the applicant to bind classes of creditors (and, if appropriate, members) to a restructuring plan, even where not all classes have voted in favour of it (known as cross-class cram down). Cross-class cram down must be sanctioned by the court and will be subject to meeting certain conditions. As is the case with Part 26 schemes, the court will always have absolute discretion over whether to sanction a restructuring plan. For example, even if the conditions of cross-class cram down are met, the court may refuse to sanction a restructuring plan on the basis it is not just and equitable. As long as the eligibility criteria for the new moratorium are met, it will also be available (but not mandatory) to use whilst the company develops a restructuring plan thereby providing a streamlined restructuring process and allowing a restructuring plan to be developed free from enforcement action.
While there are some differences between the new Part 26A and existing Part 26 (for example the ability to bind dissenting classes of creditors and members), the overall commonality between the two Parts is expected to enable the courts to draw on the existing body of Part 26 case law where appropriate."
The DeepOcean case
The DeepOcean group operates in Europe, the Americas and Africa and focuses on the inspection, maintenance, repair and decommissioning and subsea construction work. The company operated two separate businesses in the UK, with one of these comprising a cable laying and trenching business operating from Darlington and the Port of Blyth. The cable laying and trenching business was operated by three companies incorporated in England and Wales and the centre of main interests of these companies was in the UK. The parent of the DeepOcean group is DeepOcean Group Holding BV, which is a Dutch incorporated company.
The UK businesses had underperformed for many years with the consequence that it required funding from the wider DeepOcean group. This was only exacerbated by COVID-19. The creditors of the UK companies comprised, firstly, financial creditors under a facilities agreement, which had the benefit of a comprehensive security package. Secondly, there were certain claims due to a landlord. Thirdly, there were claims by two vessel owners in respect of vessels which were on long-term charters that had been guaranteed by the Dutch parent, DeepOcean Group Holding BV. Finally, there were unsecured creditors who did not fall into the categories described above. There were also a number of claims that other members of the DeepOcean group intended to continue to fund and discharge including employee claims, liabilities for tax, intercompany claims and certain claims relating to ongoing projects of the group.
The Restructuring Plans were proposed with the primary aim of facilitating the restructuring and solvent wind down of the Plan Companies in order to provide a better return to certain creditors than the likely alternative and to ensure the continued survival of the wider DeepOcean group. As part of these plans, the wider DeepOcean group provided a cash injection to enhance the dividends that would otherwise be payable to creditors as it was in the wider group's interest to avoid an uncontrolled insolvency of the UK business. The Restructuring Plans provided for different treatment for the different categories of creditors. The Restructuring Plans provided for releases of claims against the three English companies. The plans also contained mechanisms for the agreement of claims and the inclusion of a bar date. The evidence produced to the court in the form of a detailed entity priority model (EPM) showed creditors would receivable a better result than in the event of the "relevant alternative". In relation to the relevant alternative, which is defined under CIGA essentially to mean whatever the court considers would be most likely to occur if the Restructuring Plan was not sanctioned, the EPM considered two scenarios. The first was one where all group companies entered into insolvency. The second is one where the wider-group considered it could no longer fund the UK companies and as a result the UK companies would enter into administration or liquidation, which in turn would lead to a bankruptcy filing of DeepOcean Group Holding BV and certain other group entities, (but that the core of the DeepOcean group business would be able to continue). The evidence supported the view that the second of those scenarios was the more likely as the wider group would stop supporting the UK companies whilst preserving the ongoing survival of the remainder of the group. Accordingly, at the sanction hearing (see below) the court found that the appropriate counter-factual and "relevant alternative" was the second alternative.
As part of the Restructuring Plan procedure there are two court hearings, the first hearing is the convening hearing where the court considers the following:
(a) jurisdictional requirements as to the availability of the Restructuring Plan procedure. In this case the position was straightforward for the English companies although at the time of the convening hearing there were issues, which the court did not need to determine at that stage, which were first whether a Restructuring Plan is an insolvency proceeding so as to oust the application of the Recast Judgments Regulation and secondly, whether the Restructuring Plans were effective to deliver third party releases, in each case in relation to DeepOcean Group Holding BV as guarantor of the ship charters. The Court decided that these issues were more properly to be addressed at the sanction hearing. Subsequent to the DeepOcean case, the issue of what is an insolvency proceeding came before the English court on Gategroup's proposed restructuring where the Court held for the purposes of the bankruptcy exclusion to the Lugano Convention, a Restructuring Plan was an insolvency proceeding (see, Re Gategroup Guarantee Limited  EWHC 304 (Ch));
(b) whether the companies had satisfied the requirements to be able to propose Restructuring Plans – being (i) that the companies had encountered or were likely to encounter financial difficulties that were affecting or may affect their ability to carry on as going concerns and (ii) that the purpose of the plans was to eliminate, reduce, prevent or mitigate the effect of these financial difficulties. On these points the English Court was satisfied that, notwithstanding the Plan Companies would not continue as going concerns but in due course would be solvently liquidated, there is no requirement that the Plan Companies have to continue as going concerns after the plans are sanctioned. In particular, Mr Justice Trower at the convening hearing (In the Matter of Deepocean 1 UK Limited v In the Matter of Deepocean Subsea Cables Limited v In the Matter of Enshore Subsea Limited  EWHC 3549 (Ch) stated "it is doubtless the case that some of the focus of Part 26A is on enhancing the ability of a company to carry on business as a going concern there is no reason to consider that that is the only purpose for which relief can be granted". Therefore, although a criteria for use of the Restructuring Plan is that the company's financial difficulties affect or may affect its ability to carry on as a going concern, there is no requirement that the company should have to carry on as a going concern as a result of the plan being approved and therefore plans can be used to effect, for example, a run-off arrangement;
(c) the composition of the classes, which for these purposes the Court agreed should comprise the secured creditors, the landlord, the vessel owners and all other unsecured creditors;
(d) any other issues which might cause the court to refuse to sanction the plans (other than the merits or fairness which fall to be dealt with at the sanction hearing); and
(e) practical issues regarding the adequacy of notice, documentation and proposals for meeting of creditors.
On the basis that the Court was satisfied on the points described, the Court approved the convening of creditors' meetings to approve the Restructuring Plans. Prior to the sanction hearing on 13 January 2021, DeepOcean reached a compromise with the landlord and the vessel owners. However, for one of the English companies they did not at the creditors' meeting achieve the requisite 75% in value level of support. Therefore in order for the Restructuring Plan for that company to proceed, the cross-class cram-down needed to be engaged. There are two conditions to approval of the cross-class cram-down. Condition A is that the court is satisfied that, if the compromise or arrangement is approved, none of the dissenting class would be "any worse off" (which the Court considered to be a broad concept) than they would be in the "relevant alternative" and Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors present and voting who would receive a payment or have a genuine economic interest in the relevant alternative. The court in its judgment at the sanction hearing (see In the Matter of Deepocean 1 UK Limited v In the Matter of Deepocean Subsea Cables Limited v In the Matter of Enshore Subsea Limited  EWHC 138 (Ch)) said that an applicant company for a Restructuring Plan will have a "fair wind behind it" if it seeks an order to sanction a plan where these two conditions are satisfied.
In DeepOcean the court was satisfied that the return to creditors was above that in the relevant alternative. Secondly, as the plan had been approved by an assenting class (being the secured creditors) who would make a recovery in the event of the relevant alternative they had a genuine economic interest (even though the amount the secured creditors would have received in the relevant alternative would have been relatively small) so as to satisfy Condition B. Accordingly, both Condition A and Condition B were found to have been established.
Even if both conditions to cross-class cram-down are satisfied, the Court still needs to be satisfied that it should exercise its discretion to approve the Restructuring Plans. On the evidence, the court was satisfied that it was appropriate exercise of its discretion to approve the plans. Further, although the turnout at the creditors' meetings for the unsecured creditor classes was low, the Court ruled that this did not make it inappropriate to invoke the cross-class cram-down. The next discretionary factor the Court considered was what has come to be called the "horizontal comparison" that the Court will often consider when considering an unfair challenge to a company voluntary arrangement, which compares the treatment of creditors under the CVA inter se, i.e. between classes. In the case of a Restructuring Plan which provides for differences in treatment of creditors, the Court will consider whether those differences are justified and in particular the Court will be concerned that there has been a fair distribution of the benefits of the restructuring between those classes who have agreed the plan and those who have not. In DeepOcean, as the assets being made available under the plan to distribute to the dissenting class came from other group companies, the Court felt it was up to those companies to apportion that contribution in such manner as they saw fit.
In addition, the Court considered as part of the sanctioning whether there was any cause for concern as to how the plan would operate as a mechanism for varying creditor rights and effecting a distribution. Finally, as part of the decision whether to sanction the plans, the Court was required to be satisfied as to whether the plans would be substantially effective in relevant jurisdictions outside of England and Wales. In this case and in light of the agreements that have been reached with the vessel owners, it was no longer necessary for the plan companies to demonstrate that the plans would be recognised in the Netherlands. Accordingly, the Court was satisfied that it should exercise its discretion and sanctioned the three Restructuring Plans.
Although this case marks the first of its kind, it will not be the last. In many respects, a number of the difficult issues around cross-class cram-down remain to be resolved, but there is no doubt the use of cross-class cram-down as a restructuring tool under English restructuring law is now firmly established. Stay tuned for additional developments.