We predicted ground-breaking cases for restructuring plans as they evolve alongside parallel proceedings in various jurisdictions and 2024 has not disappointed. Recently, Thames Water, Britain’s biggest water supplier, has launched a restructuring plan to address its US$19.6 billion of debt, with the sanction hearing anticipated to take place in January 2025.
In this article, we discuss the lessons learned after a raft of restructuring plan decisions from the English court this year, including the Court of Appeal’s landmark decision involving the German property group, Adler.
What is a restructuring plan?
Restructuring plans have been available since June 2020 and enable a company to propose a compromise or arrangement to its creditors that can bind secured creditors, unsecured creditors, dissenting creditors and compromise members’ rights.
Directors will likely use a restructuring plan to restructure their company’s balance sheet where the underlying business is viable but for the existing debt burden. A restructuring plan does not necessarily need to be approved by all of the creditors, so can be a useful option when dissenting creditors that are not ‘in the money’ are preventing a consensual restructuring or other formal compromise arrangement. Because the creditors do not vote together, but in classes, even large individual debts cannot block a restructuring plan where the relevant conditions are met.
Lessons learned from the emerging case law
Following Adler, the UK restructuring market eagerly awaited the outcome of the restructuring plans for global construction and engineering group, McDermott. Indeed, the English court presided over two packed courtrooms for the duration of McDermott’s sanction hearing. Lasting six days, McDermott’s hearing was the longest sanction hearing to date. It was also the first Part 26A restructuring plan to compromise an International Chamber of Commerce (ICC) arbitration award and the first time a Dutch scheme of arrangement, otherwise known as a WHOA, had been successfully combined with an English restructuring plan.
McDermott and, very shortly after, another German real estate group, Aggregate, put the Court of Appeal’s guidance from Adler into practice. These cases demonstrate that the use of parallel proceedings offers greater flexibility to debtor companies with international operations and certainty of outcome in those jurisdictions.
A few lessons learnt from recent jurisprudence:
- Cost and complexity. Formal challenges to restructuring plans in which a cross-class cram down is proposed are increasingly common and the parties involved must be on a litigation footing from day one. Cross-border cases are becoming more complex and expensive than ever. Mr Justice Green was ‘horrified’ by the $150 million spend on professional fees in McDermott and was concerned that costs of this magnitude may prevent the sort of restructurings that the legislature had envisaged under Part 26A. As things stand, it is difficult to see restructuring plans becoming commonplace for small and medium-sized enterprises in the UK due to the expense, although several plans (at varying debt levels) have been sanctioned, eg, Houst, a property management services company. There is certainly room for procedural reform, such as slim lining the process to a single court hearing for SMEs and generally narrowing the issues to be decided by the judge at the sanction hearing.
- Leverage the courts. The facts of McDermott in particular were unique. Unprecedented settlement negotiations took place throughout the UK sanction hearing, which did not cut across the ‘relevant alternative’ to the plan, ie, liquidation. Those without prejudice discussions were played out before the English judge who had initially expressed a ‘lot of sympathy’ for Reficar’s position, which evaporated as Reficar failed to accept McDermott’s offer in a timely manner (on terms it had originally sought).
- English jurisdiction issues. The Adler ruling provides that the English court does not have jurisdiction to sanction a Part 26A plan which compromises stakeholders’ rights for zero consideration. Rather, the plan must constitute a ‘compromise or arrangement’ with every class involved. This low jurisdictional threshold was met in both McDermott and Aggregate. Plan companies will, however, continue to push the boundaries on this issue and further clarification is needed from the English courts.
- Relevant alternative analysis. In McDermott, the relevant alternative to the proposed plan was a key battleground. There must be ‘real substance’ to an assertion by the plan company that liquidation is most likely to occur. McDermott satisfied this evidentiary burden with testimony from credible witnesses that without the contemplated restructuring, McDermott would immediately liquidate with adverse consequences, not only for itself, but for its many employees and project partners.
- Fairness analysis. The views of ‘out of the money’ stakeholders are not relevant when determining ‘fairness’ under a Part 26A plan (Aggregate following Adler). In McDermott, Reficar’s arguments as to unfairness were undermined by the substantial offer of equity which it received. Substantial fairness must be achieved and going forward what is a fair allocation of benefits to stakeholders overall will continue to be looked at carefully by the English courts.
- Centre of main interest (COMI) issues. Evidence that COMI migration is in the best interests of stakeholders and the plan company will be tested in appropriate cases, but Mr Justice Richards was untroubled by the issue in Aggregate.
- Extending letters of credit.McDermott’s foreign plans included the first Part 26A plan to extend the maturity dates of letter of credit facilities. There was no express consideration of the extensions by the English court, so this may be another area where we see further argument.
- Landlord compromises. The clothes retailer Superdry, the Revolution Bars pub group and most recently the Cineworld chain have all used restructuring plans to compromise landlord liabilities, as well as dealing with other classes of creditors. In the Cineworld case, two landlords sought injunctions to remove certain leases from the plans on the basis that the landlord and Cineworld had earlier entered into side letters, whereby it was agreed that Cineworld would not seek to compromise the leases further by including them in a restructuring plan. The injunction was refused and the landlords were ‘crammed down’. Cineworld’s position had deteriorated more than expected and there was a requirement to treat creditors equally. However, the English court did grant one of the landlords permission to appeal the decision.
- HMRC’s position. HMRC enjoys secondary preferential creditor status in relation to certain taxes and has successfully opposed restructuring plans in Nasmyth and Great Annual Savings.HMRC has since issued guidance on when it will support restructuring plans, which it did in Revolution Bars.
- Each case is unique and consent helps. McDermott’s application for enforcement and recognition of its foreign plans was unopposed in its US Chapter 15 cases. The US court carefully considered the consensual nature of the foreign plans and the different approaches to priority taken when compared to the US approach. The US court explicitly ‘reserved the right to think about things differently’ in subsequent Chapter 15 cases.
- Non-consensual third-party releases. In the US, one of the most significant issues bankruptcy and restructuring practitioners are currently facing is non-consensual third-party releases. The US Supreme Court’s recent ruling in Harrington v. Purdue Pharma (144 S.Ct. 2071) prohibits non-consensual third-party releases in US Chapter 11 plans. This opinion does not directly address whether a US court may extend comity to, and thus enforce, an order granting non-consensual third-party releases entered by a foreign court in a non-US proceeding. This question remains open.
The final point to note is that a restructuring plan will take time to negotiate, document and implement. The English court has made it very clear that businesses must ensure they start the restructuring plan process while they have time to agree and implement the plan. The English court will not be held hostage.
Haynes Boone acted for a significant stakeholder in the McDermott case and were assisted by Wijn & Stael Advocaten in the Netherlands. Our restructuring attorneys are regularly instructed on cross-border and international insolvencies. Should you wish to discuss any issues arising from this article, please do not hesitate to contact one of the team.
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