A company can agree with its creditors to restructure its debts through various processes. This usually happens when the company’s underlying business is experiencing financial difficulties. The statutory processes are a scheme of arrangement (Scheme), restructuring plan (RP), and a company voluntary arrangement (CVA).
Each of these restructuring tools operates differently, but what unites them is their ability to vary obligations or liabilities owed to creditors in some way that assists the company’s financial recovery. For example, this may be through an extension to the maturity date or a write off in whole or in part. The company’s liabilities can be compromised without the consent of all affected creditors, provided that the requisite majority of creditors approve the compromise (typically at least 75% in value of the requisite class), and certain other conditions are satisfied.
While these restructuring tools may be used to amend existing rights and obligations of the company and its creditors, as a general rule they should not be used to impose new obligations on creditors without their consent. However, the door to imposing new obligations is not entirely shut.
Imposing obligations on creditors
Whether imposing obligations is acceptable will be a matter of materiality and context and will be linked to the liabilities subject to the compromise.
In his judgment in Re Apcoa Parking, Mr Justice Hildyard considered the existing legal authority on this “novel and important point”. While recognising that there may be “unobjectionable arrangements” involving adjustment of the lenders’ obligations, the judge remarked:
"… in creditors' schemes, it appears to me likely that the jurisdiction exists for the purpose of varying the rights of creditors in their capacity as such, and not imposing on such creditors new obligations."
In that case, the judge expressed concern that he would be unable to sanction the scheme on account of the imposition of new obligations. In response, the scheme was amended so as to make the provision of new guarantees and indemnities to third parties an option for scheme creditors rather than a compulsion. This approach found favour with Snowden J in Re Noble Group.
What constitutes a new obligation?
At the heart of imposing obligations is the question of what actually constitutes a new obligation. Arguments on this issue were considered in the context of a challenge to the Debenhams CVA in 2019. One ground for challenge was that in reducing rents payable under leases, the CVA effectively placed a new obligation on the landlords to re-let their properties to the CVA company at those reduced rents. It was argued that, as a new obligation, this was outside of the jurisdiction conferred on the CVA. Unsurprisingly, this argument (in which the challengers sought to rely on the statements in Apcoa), was rejected by the court on the basis that the CVA varied existing obligations: it did not create new ones. In other words, it did not create a new contract requiring the assumption of fresh liabilities to some new third party.
In Premier Oil, the Scottish Court of Session was asked to consider whether the extension of the maturity date of the undrawn elements of an existing revolving credit facility (RCF) amounted to new lending on entirely different and new terms, and therefore whether such extension amounted to the impermissible new obligations. In her judgment, Lady Wolffe held that the obligation of the creditors to provide the undrawn element of the RCF was an existing obligation, not a new one imposed by the scheme. Support was drawn from Apcoa, where Hildyard J had noted (obiter) that “nothing in what I say should be taken to cast doubt on mere extensions or the rolling over of existing facilities involving no new contract or more extensive obligation, such as may be the case in a revolving credit facility”.
What is the scope for imposing obligations?
In practice, UK restructuring tools can impose obligations of a minor or administrative nature on dissenting creditors, such as the requirement to enter into new documentation (which is practically effected by the grant of a power of attorney).
What is clear from the authorities is that a court will be reluctant to sanction a compromise that imposes material new and extensive obligations on dissenting creditors where no such obligations exist under the current arrangements. For example, a term loan lender will not be required to lend more money to the debtor where there is no existing commitment to do so.
What is less clear is the extent to which existing obligations may be modified so substantially as to become, in effect, new obligations. For example, could an amendment to the underlying obligations of an existing indemnity, or an extension of the availability period, purpose, conditionality and/or recourse of an RCF, be so substantial as to constitute a new obligation?
These issues would be expected to receive close scrutiny on grounds of both jurisdiction and fairness. We expect the analysis across Schemes, RPs and CVAs to be similar, but extra scrutiny will be applied to RPs that seek to utilise the “cross-class cram down” mechanic to cram down an entire dissenting class or classes.