Court of Appeal upholds restructuring plan in Thames Water

This case was the second consideration of the restructuring plan jurisdiction by the Court of Appeal. The plan had the limited purpose of providing an interim bridge to enable a further restructuring plan based on an equity raise (RP2) to be implemented at a later stage.

The plan was designed to achieve that by extending the maturity dates on certain of the plan company’s debt and by providing super senior priority funding (SSF). All holders of senior debt (defined as Class A in the judgment) and junior debt (defined as Class B) had the right to participate in the SSF. The plan also included releases by the plan company of any claims it might have against its officers and advisers in connection with the negotiations and implementation of the plan. 

The plan was opposed by an ad hoc group of holders of Class B debt, by a subordinated creditor and by Charles Maynard MP who was given permission to intervene.

The relevant alternative was a special administration (SAR). The first instance court upheld the plan including the releases.

At the Court of Appeal stage

The Class B group objected to the plan

1. On the basis that the plan gave an unfair distribution of the restructuring surplus to the Class A creditors as it gave them too much control over the design and implementation of RP2. On this point the group argued that the first instance judge has been wrong to hold that the plan was fair by reason of the fact that the Class B creditors were out of the money in the relevant alternative of the SAR.
2. That the releases granted to the officers and advisers were too wide and this constituted a “blot” on the plan or was unfair.

Mr Maynard MP objected to the plan on the basis that it wasn't in the public interest in that it would load the plan company with excessive debt and in view of the excessive costs of the plan by comparison with the SAR and this constituted a “blot” on the plan or was unfair.  

On the issue of the relevance of the view of the Class B creditors given they were out of the money, as a matter of principle, the plan company accepted that, in light of the comments of the Court of Appeal in Adler (being the first occasion when that court had considered the restructuring plan jurisdiction) as to the need for give and take in respect of any creditor whose rights were compromised by a plan, there had to be some form of consideration given to an out of the money creditor if their claim was released by the plan.

Nonetheless they submitted that this need be no more than de minimis and that, as a hard-edged rule, in assessing the fairness of a plan, no account could be taken of the fact that an out of the money creditor received nothing more than such de minimis consideration. The plan company submitted that the instant court was bound to reach this conclusion because of the Court of Appeal’s approval in Adler of Snowden J's earlier decision in Virgin Active.

The Court stated that Adler had held that, by contrast with the disenfranchisement power as against out of the money creditors which had clearly been introduced by CIGA, there was nothing in the restructuring plan jurisdiction which suggested parliament had intended to introduce a new power of confiscation. Although this part of Adler was obiter, it was not challenged in the instant case and the instant court considered it correct.

Furthermore, the Court stated that it didn't accept that there was such a hard-edged rule as contended for by the plan company in relation to the account that could be taken of the views of the out of the money creditors, or that Adler compelled the Court of Appeal to that conclusion in view of Adler’s own approval of Snowden J’s judgment in Virgin Active.

The court stated that, insofar as Snowden J was saying in Virgin Active that the fact of opposition to a plan by creditors with no genuine economic interest in the company had little or no weight, it agreed but that, if that was taken to mean that the court could not take account of the treatment of creditors who were out of the money in the relevant alternative in considering the fair distribution of the benefits generated by the plan, then the instant court disagreed with it. As a matter of principle, the court rejected the rigid approach suggested by the plan company.

As regards the current plan, it was intended to provide a bridge to try to implement RP2. It was an important circumstance that, while the relevant alternative was a SAR, the purpose of that SAR would at least initially be to provide a similar bridge to explore the rescue of the group as a going concern. The agreement by the Class B creditors was as critical in achieving the benefit of the restructuring as the agreement of the Class A debt and, given that the initial purpose of a SAR would likely be to provide a similar bridge, it didn't seem to the Court to be an answer to this point that, if there were to be a distribution within a SAR, the Class B creditors would be out of the money.

In any event the Court went on to hold that in the circumstances the control terms given to Class A creditors in the plan were not unfair.

As regards Mr Maynard MP’s arguments 

The Court held that the inquiry as to the fairness of the plan was required because sanctioning a plan had the effect of imposing a compromise on dissenting creditors. The court's involvement was – save where there was a "blot" on the plan (as to which see below) – limited to considerations of fairness as between creditors. The court would have no role at all if all creditors had agreed to the transaction to be implemented via the plan. The inability of the creditors to agree did not vest in the court a responsibility to conduct a wider enquiry as to whether the plan or a SAR would better serve the public interest; the Secretary of State and OfWat were the guardians of the public interest so far as that was concerned.

As regards the “blot” issue, it was correct that in some limited instances the interests of third parties could be taken into account in deciding whether there was any blot on a plan but in the circumstances of the instant case it did not require the Court to undertake an enquiry as to whether a SAR would better serve the interests of the public than the plan, or whether a SAR would achieve the resolution of the financial problems that had beset the Group at a lower cost than the plan.

As regards the releases

The Court referred to the “ricochet” cases. The special feature of the releases in these cases was that they prevented the release of the claims by creditors against the company being undermined by ricochet claims against the company in the event that the creditors pursued claims against directors or other third parties. There was no risk of such ricochet claims here in the event that the plan company pursued claims against its own directors or advisers.

Furthermore, while the risk of ricochet claims was not the only justification for the release of third parties, the release of claims by the plan company against their own officers and advisers did not satisfy the test.

The plan company objected that it could anyway grant such releases. The Court stated that, where a plan company returned to solvency, that may well be true, in which case there would be no need for a release to be effected by a term in the plan, but in this context the interim nature of the plan was of particular relevance, because the plan company would remain insolvent following its implementation, and it was far from clear that either company could grant effective releases in those circumstances.

The Court therefore directed an amendment to the plan so as to provide for an express carve out from the releases for any claims that might subsequently be brought by a special administrator or an insolvency officeholder of the plan company. 

Subject to that amendment the appeal was dismissed.

Thames Water [2025] EWCA Civ 475, Court of Appeal.

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