Choppy waters for restructuring plans?

Do three recent judgments stop the evolution of the restructuring plan in its tracks? Or have they provided welcome clarity on the plan’s boundaries, leading to increased certainty and better outcomes?

As further examples of court intervention might suggest that restructuring plans are facing increasing challenges in delivering a solution with a degree of certainty commensurate with the cost and time taken, it may be that the opposite is correct and that difficult cases are providing exactly the clarity needed by restructuring professionals to deploy restructuring plans to maximum effect and certainty.

AGPS Bondco plc v Strategic Value Capital Solutions Master Fund LP and others (Adler)

Much focus has been placed on the recent Court of Appeal judgment in respect of the Adler restructuring plan. Here Lord Justice Snowden, a leading authority on and advocate for plans and their forerunner the scheme of arrangement, overturned the first instance decision sanctioning the plan.

At first blush it may seem that any judicial knock back would affect the momentum of plans as a restructuring tool. However, it is important to remember that each plan is different and that each stands or falls on its own facts.

Under the pari passu rule, creditors with equivalent claims should rank and be treated equally on an insolvency. The Adler plan provided that different series of unsecured notes would retain their individual maturities despite the group being moved into a managed winddown. This meant that realisations would first be made to the notes maturing sooner and leaving the later dated notes exposed to the risk that asset values would not be sufficient to repay the notes in full. At first instance the court accepted the suggestion that if values were insufficient this would allow an acceleration that would again bring the notes an equal distribution, but the Court of Appeal found that it was not possible to predict the timing and events to be certain that the later notes would not be prejudiced.

In the case of Adler, as Snowden notes, a structure that may have made commercial sense in the context of a consensual restructuring delivered under the terms of the notes, didn’t survive transplant into the different context of a court supervised restructuring. As such, it is difficult to see how provisions that were clearly at odds with the fundamental provision of insolvency law, the pari passu principle of equal treatment, would survive court scrutiny unless this was justified by a good reason or proper basis.

While schemes of arrangement often stood or fell on the ability to keep creditors in a single class, Adler demonstrates the risk long predicted of trying to make separate classes in a restructuring plan where no true distinction would exist in an insolvent comparator.

Adler is, however, interesting for what Snowden does not rule out.

• While the grant of security to one class of notes itself appears to differ from the pari passu principle, there was sufficient rationale for this as consideration for an additional element of compromise (here the extension of maturity).
• He does not see an issue per se with the retention of substantial equity by shareholders, even where they do not contribute, noting that the allocation of equity may be in the gift of the ranking class or classes of creditor and in their gift to decide who shares in future equity.
• While noting that the plan cannot be used to expropriate or cancel debt or shareholder interests, he recognises that a nominal degree of consideration may be different.

These factors show that while Adler illustrates what may be too far for a plan to go, there is still significant flexibility for a plan company and leading stakeholders to design a plan that will work.

Few companies will have the complex debt structure that Adler had with different notes of different maturity and coupon trading at different values in the market while having the same ultimate value on insolvency. Conversely, many companies seeking to avail themselves of the restructuring that a plan will deliver will benefit from flexibility about grant of security or treatment of shareholders that Adler indicates will be possible, if properly considered and justified.

CB&I UK Ltd

Snowden also comments on the timing and process of seeking sanction for a plan, balancing the need for urgency with the need for a fair process when cramming down dissenting creditors. This issue has also been considered recently in CB&I UK Ltd.

This case relates to a restructuring plan which is still in process. The judgment relates to two procedural matters arising in the run up to the sanction hearing, raised by two separate groups of opposing creditors.

The first issue relates to the extent of information required to be disclosed. An ad hoc committee of opposing creditors has appointed a financial adviser and has been seeking information from the proposing company to assist in challenging the evidence of the company on valuation in the relevant alternative at the sanction hearing. While some requested information had been provided, there remained further outstanding requests which the opposing creditors sought an order requiring disclosure.

The court declined this request, noting that while such information may be of interest and use to the financial adviser, the court needed to be persuaded with real evidence that the information sought was actually material. No attempt had been made to explain the materiality of the information requested giving the court no basis to assess this.

On the second issue the opposing creditor was successful. Here the creditor was arguing that the previously allocated time for the sanction hearing was insufficient and that more time should be granted. In practice, the limitations of the court diary meant that even a short extension would result in a substantial delay to the hearing, which given the restructuring context had been listed on an urgent basis.

While recognising the urgency, the court had sympathy with the opposing creditor who had not had access to the volume of relevant materials to make an earlier assessment of the time required. The court noted that while the case had been scheduled as urgent, certain factors that had given rise to that urgency had developed differently, then the company should be able to continue to the rescheduled hearing date which would occur before expected events that would present material issues for the company, absent the restructuring plan being approved.

Both applications can be seen as examples of opposing creditors seeking to use procedural matters to apply pressure on the opposing company. In rejecting one and approving another, the court took a balanced approach, recognising that in the context of financial distress there will be a degree of urgency, but that this is not an absolute that overrides the interests of opposing creditors.

Griffiths v TUI

This final case does not relate to a restructuring plan, but is of interest as the Supreme Court allowed an appeal overriding an earlier judgment in the case which formed part of the analysis of the court in rejecting the restructuring plan proposed by Great Annual Savings Co Limited (GAS).

The GAS plan was rejected due to concerns as to whether GAS had discharged the duty to show, on the balance of probabilities, that creditors would be better than on the relevant alternative. Certain valuation assumptions from GAS’ expert evidence were rejected by the court without alternative expert evidence being provided by the opposing party.

In Griffiths, the Supreme Court noted that a party is required to challenge in cross examination any evidence if they wish that evidence not to be accepted, barring certain limited circumstances such as evidence of fact being manifestly incredible or bold assertions being made without reasoning to support.

The Supreme Court did not say that contrary expert evidence needed to be put forward, just that the evidence needed to be challenged on cross examination, but even this level of restriction may be problematic in the context of restructuring plans.

With a plan, it is not a given that any prejudiced creditor will have the resources or will to formally bring challenge at sanction. That does not absolve the proposing company of the obligation, identified in GAS, to discharge the burden of proof that creditors are better off than in the relevant alternative. This jurisdictional requirement was affirmed in CB&I. However, if courts are constrained by the view of the Supreme Court in Griffiths, then this may reduce the level of scrutiny under which a restructuring plan is placed and allow the expert evidence of the company to stand unchallenged.