Adler – Snowden clips the restructuring plan’s wings

The Court of Appeal overturned the first instance court’s judgment sanctioning the restructuring plan in Adler. The Court of Appeal holding that the plan was unfair in failing to equalise the position between Noteholders with different maturity dates.

The restructuring plan entailed the following:

  • The original debtor was Luxembourg registered and the first step prior to launching the plan was an issuer substitution, wherein an English company (the plan company) was substituted as the issuer of the certain German law governed notes.
  • The notes to be restructured each had different maturity dates, the relevant alternative was liquidation and on liquidation all the debts would be treated pari passu. The plan was also a wind down plan rather than a going concern plan.
  • Under the plan:
    • New money was to come into the group from any noteholders who wished to participate, and in return these lenders were to get transaction security which would rank in priority; they were to get 22.5% of the share capital in the original debtor.
    • One set of notes (the 2024 notes) was to be paid one year later than its contractual maturity and the maturity dates for the other notes were to remain the same – as a quid pro quo for extending maturity these noteholders were also to get transaction security.

The principal issues of contention in relation to the plan were:

  • The fact that certain noteholders would get paid out sooner through the wind down as a result of the fact that maturity dates were preserved, whereas in a liquidation these parties would only rank pari passu with the later dated noteholders.
  • The transaction security for the 2024 notes
  • The shareholders retaining an interest notwithstanding they were contributing nothing

At first instance, Mr Justice Leech had upheld the plan in the face of opposition from some later dated noteholders, and these noteholders appealed to the Court of Appeal.

The Court of Appeal’s judgment was given by Lord Justice Snowden. The court held:

  • Issuer substitution has not been argued at first instance or on appeal, and the court was not expressing any view on it.
  • The usual rationality test applicable for properly informed statutory majority threshold assenting classes (would an intelligent person in the class approve) does not apply where one is dealing with dissenting classes that are being crammed down.
  • A high percentage vote of assenting classes is not relevant to the assessment of fairness in the dissenting class cramdown
  • A key issue in a plan case when the court is exercising its discretion to sanction is whether the plan provides for different treatment of different classes, and whether these differences can be justified, including how the restructuring surplus is to be allocated.
  • This does not just depend on showing that the dissenting class will be better off than in the relevant alternative – the court is required to inquire how the restructuring surplus is to be allocated (the horizontal test).
  • The horizontal comparison was far more straightforward in the instant case (a wind down with a relevant alternative of liquidation where all creditors would rank equally).
  • Examples of justified departures from a pari passu distribution included:
    • Trade creditors and employees, because continued supply of goods and services by these creditors may be essential for continuation of a company’s business.
    • New money provision by existing creditors – this may provide a justification for elevation of the existing debt.
  • The first instance judge was wrong to hold that when considering the fair distribution the court should not inquire as to whether a hypothetical better or fairer plan might be available (the first instance court having instead held that one had to assess on the balance of probabilities between the two different plans of the opposing parties).
  • The distribution under the plan involved a departure from the pari passu principle:
    • Sequential payments from a potentially inadequate common fund was not the same thing as rateable distribution of that fund.
    • The first instance judge had reasoned that on the balance of probabilities he preferred the plan company’s valuation as opposed to the creditors – but the margin for error wherein there would be a deficit was very low.
    • There was therefore a material risk that later notes would not be paid in full and that should have been addressed by making all the notes payable at the same time.
  • Nor could this pari passu departure be justified:
    • The parties could have easily produced a fairer plan by eliminating the maturity dates
    • The first instance judge had reasoned inter alia:
      • i. That the commercial risk of the later notes was already priced into the notes - that was wrong: the insolvency risk was that all noteholders would be treated equally in an insolvency process.
      • ii. That as regards the transaction security, the judge had wrongly held that the question he should ask was whether the plan was so flawed that the court could not sanction it – but this rationality test was not the test when assessing the cramdown power. Nonetheless, the Court of Appeal held that the transaction security for the 2024 notes was given as a quid pro quo for the delay in the maturity of these notes from 2024 to 2025, and that could be seen as a potential justifiable departure from pari passu treatment.
    • On retention of equity by the shareholders:
      • i. There was nothing in principle preventing shareholders from retaining equity under the plan – the only relevant principle here was that the creditors should not be expected to take a haircut if shareholders retain equity unless there is a justifiable reason;
      • ii. The plan did not entail any reduction in payment to noteholders. It had been submitted that where a company was insolvent, the creditors effectively owned it and it was those creditors alone who should benefit from the restructuring surplus. This point was rejected by the Court of Appeal on the following grounds inter alia:
        • Even though it was not intended for the company to continue as a going concern, there might still have been some value in maintaining good relations with shareholders.
        • There was no suggestion that the new money holders had been irrational in seeking only 22.5%.
        • It was Snowden’s provisional view anyway that there was no jurisdiction to cancel or transfer shares for no consideration – this could be achieved through a Tea Corporation scheme, but this had the benefit of an administration which offered further protection to the left behind creditors which was not present in a restructuring plan.

In regards to AGPS Bondco Plc [2024] EWCA Civ 24, 23 January 2024, Court of Appeal.

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