• There is an enhanced framework for the court to exercise its discretion to sanction a restructuring plan involving a cross-class cram-down ("CCCD"). This test involves a review of the relative benefits to the assenting and dissenting classes of the plan and whether any differences in treatment are justified.
• Where the alternative to a restructuring plan is a formal insolvency proceeding, in principle the restructuring plan should adhere to the principle of pari passu distribution of assets between creditors and any departure from this principle will require clear justification.

Background

The English Court of Appeal has provided important guidance on using the CCCD mechanism in UK restructuring plans. In the first appeal in relation to a restructuring plan since they were introduced in 2020, Snowden LJ sets out an enhanced framework for the exercise of the court’s discretion to approve a restructuring plan that includes a cram-down of a dissenting class. In particular, the Court of Appeal has clarified that when assessing the fair distribution of the benefits of the restructuring, the court should consider whether a better or fairer plan might have been available to creditors in the dissenting class.

You can read our OnPoint alert on the sanction of Adler’s restructuring plan here, which sets out the background of the Adler group and terms of its plan.

Court of Appeal decision

Timetable and Disclosure

The Court of Appeal emphasised that the court’s willingness to determine cases quickly to assist companies that are in urgent and genuine financial difficulties must not be taken for granted or abused.

Parties must allow for the proper conduct of a contested process in their transaction timetable for a restructuring plan involving a CCCD. The potential injustice of imposing a plan on dissenting creditors pursuant to a CCCD makes timely disclosure of relevant materials to plan creditors essential.

Test for court to sanction a restructuring plan

No CCCD

The Court of Appeal reiterated that the established principles for the court to sanction a scheme of arrangement apply to the sanction of a restructuring plan with no CCCD. In summary these are (i) check compliance with the statute; (ii) check the class was fairly represented at the meeting; (iii) consider whether the scheme is a fair scheme which a creditor could reasonably approve (the “rationality test”); and (iv) consider whether there is any ‘blot’ or defect in the scheme.

CCCD

The Court of Appeal clarifies that where a court is being asked to exercise its discretion to sanction a restructuring plan that includes a CCCD, the above principles need to be modified. While (i) and (iv) continue to apply, point (ii) regarding checking the class will only apply to the assenting classes. Furthermore and most significantly, the third limb (the rationality test) needs to be modified.

Revised rationality test for a dissenting class

(i) Voting levels

For a restructuring plan including a CCCD, the court cannot simply apply a rationality test in relation to the voting within the classes, or in relation to the overall voting across the different classes.

Overall support: The overall level of support for the plan across the assenting and dissenting classes as a whole is not relevant when deciding whether it is fair to impose a plan upon a dissenting class.

Assenting classes: The support for a restructuring plan by assenting classes says nothing about the fairness of imposing the plan upon a dissenting class with different interests.

Dissenting class: While not decisive, the level of support within the dissenting class (e.g., if it surpasses a simple majority) may be a relevant consideration. That said, the court cannot simply refer to this support (below the 75% level of support required)¹ and apply the rationality test. The court will in addition need to examine the commercial reasons why the restructuring plan might be in the interests of the dissenting class.

(ii) Horizontal comparison

For a court to exercise its discretion to impose a plan upon a dissenting class, it should compare the position of that class as against the position of other classes if the restructuring plan proceeds (the so-called horizontal comparison).

This comparison should necessarily take into account the position of the creditors in the relevant alternative to the restructuring plan, but it is insufficient for the court to merely compare the position of the dissenting class with its position in the relevant alternative (the vertical comparison), as this is a jurisdictional requirement for the court to exercise the CCCD power in the first place.² The court should assess how the value generated by the restructuring plan, over and above the relevant alternative, will be allocated between creditor classes.

If the court finds that the plan results in different treatment between classes, it should consider whether such differences are justified – i.e., is there a fair distribution of the benefits (e.g., a provider of new money being repaid in priority to existing liabilities).

Snowden LJ concludes: “in a case in which a horizontal comparison shows that a plan allocates the 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”.

Significantly, in addition, as part of this exercise the Court of Appeal confirms that the court should also consider whether a different allocation of the benefits of the restructuring would have been possible – i.e., inquire whether a better or fairer plan is available.

Requirement to justify any departure from pari passu principle

The Adler restructuring plan was a “wind down” plan intended to achieve an optimum realization of the group’s assets for the plan creditors. It was proposed as an alternative to a formal insolvency process in which the claims of all plan creditors would rank equally for a pari passu distribution of the debtor’s assets.

The Court of Appeal confirmed that in such circumstances, the court will normally approve a plan where the distribution of the benefits of the restructuring over and above the relevant alternative adhere to the pari passu principle. Furthermore, the Court of Appeal confirmed that a departure from the principle of pari passu distribution of the benefits of the restructuring can also be approved so long as such departure is properly justified.

Snowden LJ declined to provide any exhaustive criteria that could justify a departure from the pari passu principle, but provided the example that creditors who provide some additional benefit to facilitate the restructuring would be entitled to receive a proportional enhanced share of the benefits.

Application to the facts of Adler’s restructuring plan

(a) Maturity dates

The key purpose of Adler’s restructuring plan (the “Plan”) was to provide the group with liquidity and time in which to conduct a managed wind-down of the group. To this end, the Plan (i) introduced new money to refinance certain existing debt, and (ii) amended the terms of six series of pari passu senior unsecured notes (the “Notes”) in an aggregate amount of €3.2 billion with maturity dates ranging from 2024 to 2029 (see our OnPoint here with the full details).

A key component of the Plan was the preservation of the existing maturity dates of the Notes so that as the group realized assets these would be applied to repay the Notes sequentially (i.e., the Notes maturing in 2029 (the”2029 Notes”) would only be repaid once all other series of Notes had been repaid).

At first instance, Adler had included evidence in support of the Plan that projected a full repayment of all Notes and, in any event, a better return than in the relevant alternative to the Plan (being a wind down in an insolvency process). Taking into account this evidence, the first instance judge had been satisfied that the Plan would not depart from the pari passu principle (as all Notes would be repaid).

The Court of Appeal disagreed with the Judge’s reasoning, noting in particular that the valuation evidence presented to the court represented a spectrum of potential outcomes without certainty that the 2029 Notes would be repaid in full. Accordingly, the preservation of the different maturity dates meant that creditors could bear the losses of an insolvency unequally, and such a departure from the principle of pari passu distribution was not justified with respect to the Plan.

(b) 2024 Notes

Another component of the Plan was the provision of new security to secure the obligations under the Notes. The Notes maturing in 2024 (the “2024 Notes”) were given priority over the other Notes in respect of realizations from this security. Unlike the other Notes, the maturity date of the 2024 Notes had been deferred (to give the group some breathing space). On the basis of this additional accommodation, the Court of Appeal was satisfied that this departure from the pari passu principle was justified.

No jurisdiction to cancel retained equity for no consideration

The Court of Appeal confirmed that the retention by the shareholders of their equity did not breach the pari passu principle given that there was nothing in the Plan providing for a distribution to shareholders ahead of the repayment of the Notes.

Snowden LJ also went on to give the provisional view that the court does not have jurisdiction to sanction a compulsory cancellation or transfer of the shares in a debtor company for no consideration, in particular taking into account that a restructuring plan requires a “compromise or arrangement”, which involves an element of give-and-take.

Consequences

The Court of Appeal sets aside the sanction of the Plan and, accordingly, the amendments to the Notes are ineffective under English law. However, the decision does not deal with the practical implications of this. In a press release following the judgment, Adler confirmed that it considers the Court of Appeal decision has no effect on the restructuring implemented in April 2023, and the amendments to the Notes remain in full force and effect under German law (the governing law of the Notes).

In his judgment, Snowden LJ expressed his surprise that counsel had not raised with the first instance judge issues that might arise if the Plan were made effective before any appeal. He observed that “[n]o application was made for a stay, or more conventionally, for the Judge to direct that the Order not be delivered to the Registrar of Companies until after he had given reasons for his decision and determined any application for permission to appeal.”

Conclusion

The Adler restructuring plan being a wind-down plan as an alternative to a formal insolvency process means some aspects of the judgment will have limited broader application. In particular, the required horizontal comparison was reasonably straightforward where it only involved classes of unsecured noteholders. This may become more challenging where a restructuring plan involves creditors holding secured and unsecured debts with different rankings and/or the relevant alternative is a different transaction or sale process.

That said, overall, the Court of Appeal’s decision provides useful guidance on the approach to restructuring plans, particularly those including any CCCD.

1. Section 901F(1) of the Companies Act 2006.
2. It is one of the conditions to a court exercising the cross-class cram-down power that it is satisfied that the dissenting class will be no worse off than in the relevant alternative to the restructuring plan (section 901G(1) of the Companies Act 2006).