On 23 January 2024, the English Court of Appeal handed down judgment in the first ever appeal of a restructuring plan under Part 26A of the Companies Act 2006.
The Court of Appeal overturned the High Court’s decision to sanction the Adler Group’s (Adler) restructuring plan (the Plan). In doing so, it clarified how the courts will exercise their discretion when asked to impose cross class cram down (CCCD) on a dissenting class of creditors.
For background to the plan, please see our previous blog post.
The Plan sought to achieve a controlled wind-down that would provide a better realisation of the group’s assets than would be possible in an immediate formal insolvency process.
Briefly, before the Plan, Adler’s Luxembourg incorporated issuer had EUR 3.2 billion of face value debt constituted by six series of senior unsecured notes (the Notes). The Notes had staggered maturities between 2024 and 2029, but, in insolvency proceedings, would rank pari passu (that is, all note holders would receive a rateable share of the funds available to pay down the noteholders).
The Plan proposed to retain the staggered maturity dates, save that the holders of 2024 notes would accept second ranking security in return for a one-year extension to their maturity date. New money would be provided by willing noteholders, who would receive first ranking security. The five other series of Notes would also benefit from the grant of new security which would rank equally as between themselves.
To bring the Plan within the English court’s jurisdiction, an English Newco was incorporated as substitute issuer for the Luxembourg parent.
The Plan proposed six classes of creditors – one for each series of Notes. All but one class voted in favour of the plan with the requisite 75% in value majority. The holders of the notes due to expire in 2029 (the 2029 Noteholders) rejected the plan, principally on the basis that in the ‘relevant alternative’ to the plan (i.e. liquidation) they would be treated pari passu with the other noteholders, whereas under the Plan they would be paid last and therefore bear the greatest risk of the plan failing.
The High Court sanctioned the plan and agreed to the CCCD in respect of the 2029 Noteholders. For a more in-depth look at the High Court’s decision, please see our earlier blog post.
The 2029 Noteholders appealed.
The Court of Appeal held that by retaining the staggered maturity dates, the Plan departed, in a material respect, from the pari passu principle without justification. In plans where the court is asked to apply CCCD on a dissenting class, it is inadequate to apply the usual rationality test applied in schemes of arrangement (which looks at whether the plan is one that an intelligent and honest person of the class concerned might reasonably approve) when the court exercises its discretion. Instead, the court should apply the “horizontal comparator” test and compare the rights of the dissenting creditor class with other classes, considering whether the distribution of the benefits of the plan is fair and whether any differences in treatment are justified. The court may also ask itself whether a fairer or improved plan might have been available having regard to the position of the dissenting class.
Importantly, the Court of Appeal was unconvinced that the Plan would result in payment in full for the 2029 Noteholders. The property valuations relied on contained a small margin for error, were inherently speculative, and highly dependent on prevailing market conditions.
While the 2029 Noteholders had commercially accepted a later maturity when they purchased the notes (which later maturity was reflected in the reduced price of the notes when compared to earlier dated notes), in the event of liquidation, the notes would be treated pari passu with all other notes and it was this ‘relevant alternative’ against which the Plan must be tested. Under the Plan, they would lose this pari passu status without justification, when a fairer plan could have been to simply align the maturity dates of the notes.
It is unclear what practical impact the English Court of Appeal’s decision will have on Adler. The English judgment provides that, at least as far as English law is concerned, the alterations to the notes effected by the plan are ineffective, and the parties would have to consider their respective positions in the light of the judgment. Notwithstanding this position, Adler has publicly stated that, in its view, the Court of Appeal’s decision to set aside the Plan has “no effect on the previously implemented financial restructuring” as it contends the amendments to the Notes are effective as a matter of German law. It remains to be seen whether further cross-border litigation will be commenced to resolve the matter.
Of wider significance, the decision re-asserts the importance of adherence to the pari passu principle when negotiating a restructuring plan and seeking to implement a CCCD. The Court confirmed that departure from this principle is permissible where there are good reasons, for example in the case of trade creditors or employees, or where creditors are supporting the restructuring by providing new money. Whether any departure from the pari passu principle will be justified will be fact specific and the parameters of this test will be developed by future cases.
Several points further to those set out above come out of the Court of Appeal’s judgment that will be relevant to future cases:
- In Adler’s case, retention of equity by shareholders did not depart from the pari passu principle, because the shareholders would receive nothing until the creditors had been paid in full. The “provisional” view of the Court was that it does not have the power to sanction a cancellation or transfer of shares, nor a complete compromise of debts of out-of-the-money creditors, for no consideration Like Part 26 schemes of arrangement, Part 26A plans require an element of “give and take” and even out-of-the-money parties should receive something under the plan.We expect that there may be further cases on what level of consideration is required.
- The Court of Appeal considered the elevation of certain creditors’ existing claims in return for providing new money (rather than simply granting senior priority in respect of that new money). The Court observed that the legitimacy of such attempts will be highly fact sensitive. However, the Court was sceptical as to whether enhanced priority could be granted to existing debts where the opportunity to provide new money is not offered to all creditors or if the money were provided on more expensive terms than would be available in the market. The judgment also suggests that any elevation in priority would need to be proportionate to the benefits provided by the new money. In Adler’s case, the Court considered that elevating the priority of the notes due to mature in 2024 was a justifiable reward for the extension of the maturity date. In future cases, parties can expect the courts to scrutinise elevation attempts closely.
- The judgment raises valuable procedural points, in particular, highlighting the importance of preparing an adequate explanatory statement and giving parties sufficient time to consider its contents. The judgment also fires a shot across the bow of any company looking to achieve a court-sanctioned restructuring in an artificially condensed timeframe. The court will not sacrifice fundamental principles of procedural fairness between the parties, nor will it be railroaded into a decision when the circumstances giving rise to the urgency were entirely foreseeable (such as a looming maturity date). Any company that does not comply with the procedural timetable risks hearing dates being adjourned.
- Given the difficulties of unwinding a plan that is implemented immediately after the plan is sanctioned, the judgment suggests that in future cases parties wishing to appeal the sanction decision should seek a stay or a delay in the plan becoming effective. This could be achieved by requesting a delay in the Order being delivered to the Registrar of Companies until reasons for the decision have been given and permission to appeal determined. In the light of the Court’s comments above regarding urgent applications, it will be interesting to observe the circumstances in which the court may be prepared to grant such stays and whether they become common practice or be on terms that deter any party seeking such a stay.
- It has long been established that the sanction hearing in schemes and restructuring plans is not a rubber-stamping exercise. The judgment confirms that in plans involving CCCD, the court will exercise its discretion robustly and carefully. Satisfying the statutory conditions for CCCD merely opens the gateway to possible sanction, and the “fair wind” that blows with schemes of arrangement that have the benefit of a strong majority approval does not blow with a restructuring plan seeking to implement a CCCD. When exercising its discretion, the overall levels of support from assenting classes is irrelevant to assessing whether the plan is fair in respect of the dissenting class(es).
- The Court made clear that the judgment should not be taken as an endorsement for future cases of the technique of substituting an obligor or creating an English co-obligor of debt owed by a foreign entity to bring a plan within the English court’s jurisdiction. This may provide a potential ground for challenge in future cases.