What Happened
On 23 January the
Part 26A restructuring plans empower an English Court to order a compromise or arrangement of debt obligations, even if there is one or more dissenting class of creditors (a power referred to as "cross-class cram-down"). The Court may do this if (inter alia) it is satisfied that none of the members of the dissenting class or classes would be any "worse off" than they would be were the restructuring plan not to be sanctioned by the Court.
The Background
In
The Pari Passu principle
The key reason why the
Why did the Plan violate the Pari Passu principle
As noted above, a feature of the sanctioned plan was that it maintained the original chronological maturity dates of the different series of notes (albeit with the earliest 2024 notes being extended to 2025). The longest dated debt instruments were the 2029 notes held by the AHG. Understandably, the holders of the 2029 notes objected to this feature of the plan due to concerns that there was a risk they would not be repaid given the financial state of the
"...adherence to the principle of pari passu distribution of the Group's assets would have eliminated that risk by proportionate distributions being made rateably to all Noteholders from time to time. Put shortly, sequential payments to creditors from a potentially inadequate common fund of money are not the same thing as a rateable distribution of that fund".3
That said - the Court acknowledged that a departure from the principle of pari passu distribution of the benefits of the restructuring can be permitted if there is a good or proper reason for that departure. We offer some insight into what this might mean below.
Where to from Here?
The Court of Appeal's decision to reverse the plan leaves many wondering what happens now? The Group has already commenced implementing the restructuring that had been approved by the
On appeal it was submitted by the Group that the Court should be slow to interfere with the
From a practical point of view looking forward, the Court suggested that where an appeal of a plan is contemplated, parties should consider applying for implementation of the restructuring plan to be stayed until after permission to appeal is determined (though many potential applicant groups in a dissenting class might be dissuaded from so doing by the need to provide a cross-undertaking in damages).
Other Key Takeaways from the Judgment
When can a restructuring plan depart from the Pari Passu principle?
It seems that a plan can depart from the pari passu principle for a good or proper reason. Practitioners will no doubt be querying what amounts to a "good" or "proper" reason. The Court of Appeal declined to provide an exhaustive list of criteria that might qualify, considering that such an exercise would neither be possible nor advisable.5 However the Court did say that a departure could be justified if a creditor provided new money to facilitate a restructuring. In this scenario the creditor should be entitled to receive full payment of that new money under a plan in priority to the pre-existing creditors.6
Did the priority given to the 2024 Notes by the enhanced security violate the Pari Passu principle?
The plan gave the 2024 noteholders enhanced security in the form of priority over the other series of notes. The additional security was offered as a quid pro quo for the 2024 noteholders deferring their maturity date. While the
Discretion to sanction a plan - what test applies?
The judgment provides guidance on the principles applicable to exercise of the Court's discretion to sanction a restructuring plan in the context of a "cross class cram down".
However, the
The Court of Appeal instead confirmed that the Court should consider the horizontal comparator test. This test, developed in the context of company voluntary arrangements requires a comparison of "the position of the class in question with the position of other creditors or classes of creditors (or members) if the restructuring goes ahead".10 That comparison asks how different classes of creditor should be treated relative to each other in the relevant alternative; and investigates whether their relative treatment under the plan is consistent with that relevant alternative, or whether there is differential treatment. If there is differential treatment, a 'good reason' must exist for such differentiation and it must be justified on a 'proper basis'.
The Court of Appeal found that there was insufficient justification to sanction differing treatment of creditors between the relative alternative (being the German liquidation where the AHG would be in the normal pari passu position) and the restructuring plan, noting that the "parties could easily have produced a fairer plan that eliminated the different treatment of the different series of Notes by agreeing to harmonise the dates".11
What is the best plan?
In applying the horizontal comparison test the Court will be required to consider whether the proposed plan is the "best" plan, and whether a different formulation of the plan could be "fairer". This is a significant move away from the scheme cases where the Court was not required to consider if a scheme could be "fairer" but only whether it was "fair".
Important procedural considerations for future plans
The Court of Appeal's judgment also highlighted some significant procedural considerations for companies proposing a restructuring plan. A particular issue of note in
Can shareholders retain equity?
It seems like it is perfectly acceptable for a restructuring plan to impose a haircut on creditors while allowing shareholders to retain equity without infringing pari passu. Ultimately, in an insolvency scenario shareholders would not be paid until creditors were paid in full. Thus it was not a departure from the pari passu principle for a plan to allow shareholders to retain an equity position. And further, following the view taken in
Can shareholders or creditors be 'zeroed'?
The AHG contended that, as the shareholders were adding nothing of commercial value and were not providing any new money the shareholders should not be permitted to share in any potential upside flowing from the plan. The corollary of this is that their shares should be cancelled or transferred to the plan creditors. The Court did not accept this argument, offering a provisional view that there is no jurisdiction under Part 26A to "zero" (whether by cancelling or transferring) the shares in a debtor company for no consideration.13
Is the Issuer Substitution technique in the cross-hairs?
The Group utilised the "Issuer Substitution" to engage the jurisdiction of the English restructuring plan. This involves incorporating an English incorporated company which assumes the group's debt and launches the restructuring proceedings. In this case, the English company was
Footnotes
1
2
3 [2024] EWCA Civ 24, per Snowden LJ at 193.
4 https://www.ft.com/content/82d23ce7-3aeb-4052-a8ff-a08c5f69fbe4
5 [2024] EWCA Civ 24 per Snowden LJ at 166.
6 [2024] EWCA Civ 24 per Snowden LJ at 168.
7 [2024] EWCA Civ 24 per Snowden LJ at 226.
8 [2024] EWCA Civ 24 per Snowden LJ at 231.
9 Indeed, the total number of creditors who voted to approve the plan amounted to 84% of plan creditors across the six classes.
10 [2024] EWCA Civ 24 per Snowden LJ at 149.
11 [2024] EWCA Civ 24 per Snowden LJ at 203.
12 [2021] EWHC 1246 (Ch).
13 [2024] EWCA Civ 24 per Snowden LJ at 258.
14 See e.g.
15 [2024] EWCA Civ 24 per Snowden LJ at 34.
16 See e.g.Port
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