In Short
The Situation: The Adler Group sought to restructure more than €6 billion of debt by means of a UK restructuring plan ("RP"), to give itself a runway for a planned wind-down and asset sales, leading to an enhanced return for creditors when compared against an immediate insolvency. The RP sought to retain a phased maturity of the senior unsecured notes. Certain creditors argued that this was an unacceptable departure from the pari passu principle, given that the notes would have ranked equally in the relevant alternative—an immediate winding-up.
The Result: After the RP received initial sanction from the High Court, certain creditors appealed the decision to the UK's Court of Appeal (the "Appeal Court"). The creditors successfully argued that the proposed restructuring was a departure too far from such fundamental pari passu principles. Moreover, as this was the first-ever appeal of an RP, the Appeal Court took the opportunity to pass broad comment on the increasingly creative and flexible use of RPs.
Looking Ahead: This decision provides clearer authority on a number of issues that will be central to constructing a successful RP, including, in particular, the ability of RPs to depart from pari passu principles. The Appeal Court also made clear its support for RPs as effective, practical tools available across the spectrum of corporate structures, and each of its comments clears the way for even more creative and flexible RPs to be brought before the English courts.
On 23 January 2024, the Court of Appeal in England and Wales upheld a challenge launched by dissenting creditors to overturn Adler's RP previously approved by the High Court under Part 26A of the Companies Act 2006 (Strategic Value Capital Solutions Master Fund LP and others v AGPS BondCo PLC [2024] EWCA Civ 24). In his judgment concerning the first-ever appeal of an RP, Lord Justice Snowden creates important authority which helps to define the creative boundaries of RPs, including, in particular, the application of the pari passu principle.
Background
The Adler Group develops and operates multifamily residences across Germany. Having become over-leveraged, the Group owed in excess of €6.1 billion in external debts. These included senior unsecured notes (the "SUNs"), which had various maturity dates falling between 2024 and 2029.
Ahead of the SUNs beginning to mature, the Group opened restructuring negotiations with its creditors in 2022. Absent a restructuring, the Group considered itself likely to exhaust its available liquidity and default under its debt documents. The likely result would be the acceleration of its debts, an immediate insolvency and an asset fire-sale. The Group's restructuring proposals aimed to provide the Group with liquidity and time in which to conduct an orderly sale of assets, thereby seeking to maximise returns to its creditors. Those negotiations proved unsuccessful, and the issuer of the SUNs proposed an RP—a tool pursuant to which a debtor can (with the approval of the court) seek to impose a wholesale debt and/or equity restructuring on dissenting stakeholders. The RP requires the approval of at least 75% in value of each voting class; however, a dissenting class can still be bound by an RP where the court is satisfied that two conditions are met: (i) the proposed RP would leave the dissenting class in no worse a position than in the relevant alternative; and (ii) at least one other affected class has voted in favour of the RP. This process is known as a cross-class cramdown ("CCCD").
Proposed Restructuring
By means of the proposed RP, the Group sought essentially the same restructuring as it had targeted through the failed, consensual negotiations. The SUNs in aggregate constituted €3.2 billion of the Group's external debt and were split across six series, each with its own maturity dates and interest rates. The first SUNs matured on 26 July 2024 (the "2024 SUNs"), others matured through 2025–2027 and the sixth series matured on 14 January 2029 (the "2029 SUNs"). A parent company within the Group had also issued a further three series of notes, with a principal amount of €965 million, that matured between 27 April 2023 and 6 February 2024 (the "Parent Notes").
In order to facilitate a managed wind-down of the Group's assets, the restructuring sought to introduce liquidity into the group through the: (i) capitalisation of interest on the SUNs in return for an increase in the coupon; and (ii) introduction of €937.5 million worth of new money on a senior secured basis. Further, the Group sought to retain the phased maturity dates of the various SUNs (only extending the maturity date of the 2024 Suns by one year) and amending the enforcement waterfall, such that the additional liquidity would rank first for repayment, followed by the 2024 Notes, and then the other Notes equally as among themselves.
All classes achieved the requisite level of votes required to approve the RP except in respect of the 2029 SUNs. Despite challenges raised by members of the dissenting class, the High Court approved the RP on the basis that it was satisfied that the conditions required to implement the CCCD were met. Certain of these creditors appealed this decision on the grounds we discuss below.
The Court of Appeal's Conclusions
As the first-ever appeal of an RP, Lord Justice Snowden's judgment creates important authority on a number of issues which help to define the creative boundaries of RPs. The key legal takeaways are as follows:
Pari Passu—Maturity. One of the fundamental challenges to the RP was that, in retaining the phased maturity dates of the various SUNs (and expressly prioritising the 2024 SUNs), it diverged from the pari passu principle. The concept of pari passu distribution is a fundamental principle of English insolvency law and embodies the concept of equality in right of payment. As Lord Justice Snowden put it, "no creditor should be paid any amount from the common pool ahead of other creditors who rank equally with him if to do so creates a risk that the other creditors will not be able to be paid the same rateable proportion of their claims." Upon sanction of the RP, the High Court had held that the difference in maturities of the various SUNs was a risk which SUN-holders would have considered when subscribing for SUNs. Therefore, the High Court found that the RP did not transgress the pari passu principle but reflected the actual operation of the SUNs' differing maturities.
By contrast, the dissenting creditors argued that the RP prioritised the early-maturing SUNs whereas, in the relevant alternative, the SUNs would have been treated equally. As Adler would have repaid the SUNs by means of asset sales, as the SUNs fell due, the SUNs that matured first would have had less risk of the asset sales failing to generate sufficient funds to repay each SUN. The later-maturing SUNs, however, were exposed to greater risk—under the RP—of insufficient funds being raised. That difference in risk would not have arisen in an immediate winding-up of the Group, which the High Court found to be the relevant alternative. The dissenting creditors (comprising certain holders of the latest-maturing 2029 SUNs) were the most exposed to this risk of diminishing returns.
The Court of Appeal determined that the differing treatment of the SUNs did depart from the pari passu principle and was unacceptable in this case (as their differing maturities would not have impacted their ranking in the relevant alternative—an immediate winding-up).
Pari Passu—Exceptions. Despite finding that the RP violated the pari passu principle, the Court of Appeal confirmed that exceptions thereto are acceptable where a departure is "justified" by a "good" reason or "proper" basis. The Appeal Court did not consider it possible or appropriate to attempt to prescribe an exhaustive list of criteria that might qualify. Instead, it provided various examples that might pass muster, such as where creditors receive some priority or a proportionately enhanced share of the benefits in return for providing some additional benefit or accommodation to assist the achievement of the restructuring in the interest of creditors as a whole (such as, in this case, the granting of security to the 2024 SUNs within the RP, as part of a quid pro quo for 2024 SUN-holders providing the new money).
Rationality. In general, the Appeal Court subjects an RP to the "rationality test" (i.e., whether an honest and intelligent person would approve the proposal). The Appeal Court determined that the rationality test is not enough to justify exercise of the CCCD. Instead, the Appeal Court will test the treatment of crammed-down stakeholders on the horizontal and vertical comparators—namely, a stakeholder's return in the relevant alternative and its comparative returns against other stakeholders.
Competing Plans. The Appeal Court confirmed that RPs do not need to result in the best or fairest outcome. However, where the CCCD is exercised, the Appeal Court will conduct a more stringent evaluation of stakeholders' benefits and losses under the RP. This finding may open the door to compromised stakeholders proposing competing plans (as sometimes occurs in certain circumstances in US Chapter 11 proceedings).
Disclosures. Given the importance of valuation information to allow compromised stakeholders to challenge an RP, the Appeal Court indicated that the court should intervene where parties fail or delay in providing valuation evidence by exercising its powers of specific disclosure and other case management powers robustly.
Timing. Although not raised as a ground for appeal, the Appeal Court criticised Adler's restructuring timetable as affording insufficient time for the proper conduct of a contested RP. Companies need to provide the High Court with appropriate time to hear the case, deliver a reasoned opinion and permit time for the determination of any application for permission to appeal.
Issuer Substitution. As the SUNs are governed by German law, in order to engage the jurisdiction of the English courts for the purpose of proposing an RP (and gaining access to the CCCD), the issuer of the SUNs was substituted with an English incorporated entity. Whilst also not raised as a ground for appeal, the Appeal Court observed that the fact that it did not consider whether the substitution of an issuer was a valid technique for establishing jurisdiction in the English courts should not be taken as an endorsement of that process.
Interim Remedy. The Appeal Court noted its surprise that the dissenting creditors did not seek a stay of the sanction order or an order that the RP not be delivered to Companies House (at which point it would have become effective) pending receipt of the High Court's sanction decision and determination of any application to appeal that decision. The court indicated that such matters should be raised by dissenting parties with the High Court judge.
Share-Stripping. Under Adler's RP, the existing shareholders retained 77.5% of the equity (with the remainder offered to those creditors participating in the new money). The dissenting creditors argued that the retention of equity by the existing shareholders was unfair—the company was insolvent, and therefore they alone should own the company, and be entitled to any surplus value. The Appeal Court held that as an RP needs to involve a compromise among parties, even in insolvency-imminent situations, it cannot have been the intention of Parliament that shareholders could be stripped of their shares without an element of consideration since such an arrangement would be a "mere surrender or forfeiture" and not a "compromise". The Appeal Court left open the question of what consideration would be sufficient. That is not to say that existing shareholders could not be diluted by an RP to such an extent that their remaining interest was essentially worthless or that an alternative transaction structure could be adopted to achieve the disenfranchisement of existing shareholders.
Grounds for Appeal. For the first time, the Appeal Court defined when a party may appeal against sanction of an RP. Those grounds are if a judge applies incorrect legal principles, considers irrelevant factors (or fails to consider relevant ones) or comes to a conclusion on the facts that no reasonable judge could reach.
Three Key Takeaways
- The immediate impact on the Adler Group is limited as the dissenting creditors did not seek the suspension of the restructuring pending the appeal. Next steps for Adler, therefore, remain to be seen.
- This decision provides clearer authority on a number of issues that will be central to constructing a successful RP.
- Each of the Appeal Court's comments as to the ability of RPs to depart from pari passu principles, the contemplation of competing plans and the absence of an "absolute priority" rule clear the way for even more creative and flexible RPs to be brought before the English courts.
