In Short
The Situation: The
The Result: After the RP received initial sanction from the
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
Background
The
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
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
The Court of Appeal's Conclusions
As the first-ever appeal of an RP, Lord
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
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
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
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
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
Share-Stripping. Under
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 forAdler , 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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