Despite three recent landmark UK restructuring plan decisions, uncertainty remains around the value, if any, a plan company should offer dissenting creditors as the “deliverability price” of a plan.

Since the introduction of restructuring plans in 2020, the approach taken by the court in the exercise of its discretion to cram down a dissenting creditor class has gradually become clearer through a series of first instance decisions. Whether a dissenting creditor class is “in-the-money” or “out-of-the-money” in the relevant alternative of what would be most likely to happen were the plan not sanctioned has proven critical to the court’s analysis. However, this may not always provide a binary answer notwithstanding the court’s reluctance to become embroiled in valuation disputes. This article considers the scope for dissenting creditors to challenge successfully a plan by exploring three critical and related questions:

1. Can multiple relevant alternatives be proposed to undermine the plan company’s assertion that a creditor class is “out-of-the-money”?
2. What value should assenting creditors give to dissenting creditors in order for a plan to be considered “fair”?
3. Are there limits to the ability of shareholders to retain their equity when prior ranking creditors are impaired under a plan?

In-the-money, in the room

If a creditor class is in-the-money, any departure in the restructuring plan from the order of priority that would apply in the relevant alternative will require careful justification by the plan company. In assessing the fairness of differential treatment between similarly ranking creditor classes, the court has adopted a “horizontal comparator” test to determine whether the differences are justified. Re Deep Ocean 1 UK Ltd [2021] EWHC 38 (Ch) at [63].

It has become common practice for a company to exclude unsecured trade creditors entirely from a plan in which in-the-money secured creditors are impaired. This inversion of the order of priority in a relevant alternative of liquidation is typically justified as necessary to preserve the plan company’s ongoing business as a going concern, as the continued goodwill of trade creditors through being “kept whole” is considered beneficial to all other creditors. Similarly, any preferential treatment of creditors providing “new money” (and any related elevation of their existing debt) could be justifiable provided that the additional benefits accruing to those participating creditors under the plan compared to those who do not participate is proportionate to the value given to the plan company. Re E D & F Man Holdings Limited [2022] EWHC 687 (Ch). The deliberate decision taken in the legislation to avoid an absolute or modified priority rule affords plan companies considerable flexibility to alter priorities within the parameters of overall fairness.

The differential treatment given to the in-the-money 2029 noteholders in AdlerRe AGPS BondCo Plc [2024] EWCA Civ 24. compared to the earlier maturing series of notes was fatal to the fairness of the plan precisely because the company failed to articulate a sound commercial rationale for preserving the existing maturities of pari passu series of notes in a plan that replicated the outcome of a controlled liquidation of the company’s assets over time. The Court of Appeal held that it was incumbent on the court to enquire whether a fairer or better plan is available. Snowden LJ confirmed that “in a case in which a horizonal comparison shows that a plan allocates benefits of the restructuring differentially between the assenting and dissenting class in a material respect, and no justification has been given for that, it would, I suggest, take a compelling reason to persuade the court to sanction the plan nonetheless”.Re AGPS BondCo Plc [2024] EWCA Civ 24 at [209].

Out-of-the-money, out of the room?

If a creditor is out-of-the-money, the court will attribute “little or no weight”Re Virgin Active Holdings [2021] EWHC 1246 (Ch) at [311]. to its objections to the fairness of the plan and the allocation of the restructuring surplus between creditors. This approach is built on the premise that a creditor lacking any present economic interest in the debtor should ordinarily be deprived of any continuing economic interest in the restructured company. A similar concept is included within the legislation in a different context: a plan company may pre-emptively exclude a class of creditors from voting in a plan meeting if the court is satisfied the class lacks a “genuine economic interest in the company”.Companies Act 2006, section 901C(4). Although to date this route has been used sparingly by plan companies, it remains an option to air valuation issues upfront at the convening stage rather than as part of a contested sanction hearing.

One obvious way for an out-of-the-money creditor to undermine the company’s case is to challenge the validity of the relevant alternative to the restructuring plan. If the creditor is able to persuade the court that there is a more likely alternative that would offer it more than the proposed plan, the company will not be able to satisfy the jurisdictional hurdle that a dissenting class must be no worse off than it would be in the relevant alternative.

Multiple relevant alternatives?

The main purpose of the McDermott restructuring plan was to reduce significantly a large but unsecured arbitration award made against the plan company and other related claims. The holders of the claims opposed the plan and argued that the true relevant alternative was not a liquidation, as the company proposed, but a further round of creditor negotiations to compromise the claims at a higher level. In the event that the plan failed, it was argued that the senior secured creditors would not precipitate a group-wide liquidation because they stood to lose substantially more in an uncontrolled liquidation than they would under a renegotiated deal to compromise the arbitration claim on improved terms. In other words, the company’s offer to settle under the terms of the plan was no more than an opening gambit.

In the Aggregate restructuring plan, Project Lietzenburger Strasse Holdco Sarl [2024] EWHC 468 (Ch). the opposing out-of-the-money junior creditors rejected the company’s relevant alternative of an English liquidationThe plan company successfully moved its “centre of main interests” from Luxembourg to England. and instead proposed an alternative restructuring spearheaded by the junior creditors pursuant to the new Luxembourg restructuring law (the plan company’s jurisdiction of incorporation), which would give the junior creditors a better return than under the plan.

In each case, the opposing relevant alternative was dismissed by the court. In Aggregate, the judge found the junior creditor’s plan to be unimplementable because it was opposed by the senior secured creditors, who, based on the evidence, would have enforced their security had the plan failed. In McDermott, subsequent events in the parallel Dutch restructuring of the plan company’s parent company (which resulted in a “generous offer” of equity in the parent to the opposing creditor) largely relieved the English court of the need to engage substantively with the opposing arguments.

Both cases illustrate the uphill task that an out-of-the-money creditor faces if its relevant alternative requires the active support not only of the plan company but also the other in-the-money stakeholders.

Shareholder return?

The “little or no weight” approach is brought into sharp relief when shareholders lacking any present economic interest nonetheless retain a continuing interest under a plan while more senior ranking creditors are impaired. In Virgin Active, this outcome was in part justified by the provision of fresh capital by the shareholders.Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) at [267] to [300]. Further, the retention of equity by the shareholder was supported by the secured creditors. Based on the valuation evidence, they held the entire economic interest in the company and so, on the court’s analysis, were able to direct the apportionment of the restructuring surplus how they best thought fit.

In contrast, the shareholders in McDermott retained their equity without providing fresh capital investment. The retention of equity by the shareholders was similarly supported by the group’s senior lenders, but this justification was arguably weakened because the majority of senior lenders were themselves shareholders as a result of an earlier Chapter 11 reorganisation plan under which each had taken an equity stake in the company. This allowed the opposing creditors to characterise any “gifting” of the equity by the senior lenders as self-serving.

Although the judge demurred from disagreeing with the Virgin Active approach, he was sympathetic to the view that “there should be some scope for making a horizonal comparison between out of the money creditors and shareholders in testing the fairness, as between them, of the proposed distribution of the restructuring surplus under the Plan”.Re CB&I UK Limited [2024] EWCA Civ 398 (Ch) at [117]. This may well be the court’s way of giving “little” rather than “no” weight to the dissenting class’s argument. However, it leaves unanswered the question of how far an in-the-money class can rely solely on the “gifting” back of equity to the existing shareholders when no new value is provided by those shareholders by way of contribution to the restructuring surplus. In the event, the parallel Dutch WHOA restructuring plan of McDermott’s ultimate Dutch parent company provided the dissenting creditor with an offer of up to 19.9% of the restructured equity in the parent, which adequately rebutted any argument of unfairness. In doing so, the WHOA arguably spared the English restructuring plan’s blushes by allowing it to sidestep the issue. The iterative nature of the WHOA proceedings allowed the parties to coalesce around an acceptable plan.

A structural flaw?

The McDermott case exposed some procedural limitations of the English restructuring plan when compared with other more fluid restructuring processes. Based on the inherited architecture of the scheme of arrangement, the English restructuring plan presupposes that a plan proposed by the plan company represents its best and final offer following the exhaustion of negotiations between the parties and the failure to reach a fully consensual deal. Following the launch of the plan by the company, there is only limited scope for amendment by either the parties or, in marked contrast to Chapter 11, the court. Although the court must enquire whether a “fairer” plan might have been proposed, it is able to give only a binary judgment on the original plan presented by the company to its creditors.

The introduction of cross-class cram-down has fundamentally altered the negotiating dynamic. At least on one view, a plan company (including its shareholders) is incentivised to withhold value provided that it can show that the restructuring surplus has been allocated fairly and opposing creditors are in no worse position than they would be in the relevant alternative. This is perhaps best illustrated in cases in which the plan company and its shareholders propose a plan in alliance with the company’s senior lenders to the disproportionate detriment of junior and unsecured lenders.

It remains unclear how far, faced with the prospect of an effective foreclosure of junior creditor interests and disputed relevant alternatives, the court will be prepared to sanction a plan in which shareholders retain a material ownership interest while providing little or no contribution to the restructuring surplus.

ENDNOTES

¹Re Deep Ocean 1 UK Ltd [2021] EWHC 38 (Ch) at [63].

²Re E D & F Man Holdings Limited [2022] EWHC 687 (Ch).

³Re AGPS BondCo Plc [2024] EWCA Civ 24.

⁴Re AGPS BondCo Plc [2024] EWCA Civ 24 at [209].

⁵Re Virgin Active Holdings [2021] EWHC 1246 (Ch) at [311].

⁶Companies Act 2006, section 901C(4).

⁷Project Lietzenburger Strasse Holdco Sarl [2024] EWHC 468 (Ch).

⁸The plan company successfully moved its “centre of main interests” from Luxembourg to England.

⁹Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) at [267] to [300].

¹⁰Re CB&I UK Limited [2024] EWCA Civ 398 (Ch) at [117].