Some interesting recent scheme and plan law of late, proving that schemes and plans continue to be popular restructuring tools for all types of companies and international groups.
DeepOcean companies (Part 26A plans) – January 2021
This was the first time that the court had to consider the application of the new ‘cross-class cram down’ procedure under Part 26A. Trower J approved the plans proposed by three DeepOcean companies but had reserved judgment and in late January handed down a written judgment with important guidance for future plans.
In considering whether to sanction a cram down plan, Trower J stated that the starting approach can be found in the explanatory notes to the Corporate Insolvency and Governance Act 2020, stating that the notes indicate that the applicant company will have a "fair wind behind it" if it seeks to cram down a dissenting class where the relevant statutory conditions have otherwise been satisfied. Trower J noted that the notes are drafted in such a way which suggests that, where those conditions are satisfied, the court will focus on the "negative question" of whether a refusal to sanction is appropriate on the grounds that the plan is "not just and equitable" and not on the more positive question of why justice and equity point to the plan being sanctioned.
The “relevant alternative” here was deemed by the court to be liquidation of the relevant entities. In addition:
- Condition A (dissenting class must be no worse off in the relevant alternative): The court held that “no worse off” is a broad concept and required taking account of all aspects of the company’s liability to the creditor in question (not necessarily limited to expected dividend). Here, it was found that the dissenting class would be better off than in a liquidation.
- Condition B (consenting class with genuine economic interest): It was held to be clear on the facts that this condition had been met. In general, this is a question of evidence. The court added that it may revisit class constitution at the sanction hearing if it appears that some “artificiality” has been introduced into the plan to ensure Condition B is satisfied – on the basis the possibility of artificiality only becomes apparent at sanction stage.
On the question of whether the court should exercise its discretion to sanction a plan, it held that it will consider:
- the overall support for the plan (including voting turnout, representation and why the dissenting classes voted against the plan);
- the differing treatment of creditor classes and whether such treatment is justified (the so called "horizontal comparator"). In this case, differing treatment between secured and unsecured claims was justified – the “relevant alternative” would see the unsecured claims with no prospect of any return and their return (i.e. “restructuring surplus”) via the plan was a result of contributions of entities within the wider group not subject to the plan; and
- other factors from scheme jurisprudence (e.g. influence of any collateral interests on a creditor’s decision, whether there is any blot on the plan and the overall support for the plan).
At the convening hearing, the court helpfully confirmed that there is no requirement that a plan seek to preserve the company's business as a going concern.
MAB Leasing Limited (Part 26 scheme) – January 2021
Zacaroli J at the convening hearing held that the aircraft lessors (pursuant to 52 operating lease agreements) formed a single class. This is significant as it opens up the possibility of using UK restructuring tools to restructure other types of leases (incl. real estate) which are currently more likely to be restructured via the CVA process.
Among a menu of options, the scheme provided an “option” to terminate leases. This was permitted as it did not interfere with proprietary rights which had been an issue in the Instant Cash case in relation to schemes and the Debenhams case in relation to CVAs.
Another key issue which was discussed, but not decided given that all creditors approved the scheme, was whether a scheme was an insolvency proceeding for the purposes of the Cape Town Convention (“Convention”) – the consequence of which would be consent from each individual lessor would be required in order to vary the terms of each lease. The court noted that there were persuasive arguments that a scheme was not an insolvency proceeding and therefore the Convention did not prevent a UK scheme from varying leases without the consent of each individual lessor.
The MAB Scheme is the first to be considered at convening hearing post-Brexit. The main point to note here is that the EU Judgments regulations are now irrelevant for establishing jurisdiction.
gategroup Guarantee Limited (Part 26A plan) – February 2021
In an important judgment for future cases, Zacaroli J held that Part 26A plans are insolvency proceedings and therefore fall outside European civil and commercial jurisdictional rules. Pre-Brexit case law tells us that Part 26 schemes are probably not insolvency proceedings and are therefore capable of falling within those rules. Zacaroli J found that the "financial difficulties" threshold conditions to Part 26A plans (which do not exist for Part 26 schemes) made a significant difference.
Post-Brexit, the European civil and commercial jurisdictional rules no longer apply to the UK (for post-Brexit cases), so both Part 26 schemes and Part 26A plans are not constrained by such jurisdictional rules (for example, rules preventing a court hearing a case in breach of an exclusive jurisdiction clause in favour of another country) but equally they do not benefit from the recognition of any judgment under those rules.
However, the UK may at some point accede to a form of those European civil and commercial jurisdictional rules (the Lugano Convention which is very similar to the EU Judgments Regulation). This means we could see a very different outcome, with Part 26 schemes being subject to those rules and Part 26A plans falling outside of them.
This will raise some interesting additional considerations in deciding which process to use (where there is a choice) and may add flexibility to our UK restructuring procedures.
The court also addressed the co-obligor structure in a very detailed analysis of the case law in this area. This is where a new company is incorporated (or an existing non-obligor is found in the group) which then (i) assumes the original debt obligation as a co-obligor, (ii) uses a scheme or plan to compromise that debt with relevant creditors and (iii) uses a third party release mechanic/covenant to allow the original obligor to benefit from the compromise. This is often done to avoid triggering a default or cross-default in the group's debt.
The court held that this structure did not create a jurisdictional impediment but whether it should prevent the court sanctioning the plan on discretionary grounds should be determined at the sanction hearing. It will be interesting to see the outcome at sanction. This may also result in guarantor led schemes requiring careful thought (although this raises slightly different issues, the issue of necessity required to justify a third party release is of relevance to that analysis too).
Global Ports Holding (Part 26 scheme) – February 2021
At the initial convening hearing (which was adjourned), Snowden J held that the explanatory statement was lacking in detail in relation to a success fee (see below) and that sufficient notice had not been given to noteholders - as a consequence, the scheme could not proceed. At the second hearing, Snowden J requested further clarification on the success fee arrangements that a financial advisor had with a subgroup of the company’s creditors and on the level of access other scheme creditors (outside of the subgroup) had to the financial advisor’s advice. He questioned whether it was appropriate for scheme creditors and the company itself not to know the identity of the subgroup. Snowden J had two main concerns with the success fee:
- the subgroup had stated that it would not support the scheme unless its financial advisors were allowed to carry out their own due diligence on the group. Snowden J therefore asked if this meant that the subgroup was not content with the information that it had been given in the explanatory statement by the company; and
- it appeared that the financial advisor would receive significantly more (i.e. through the proposed success fee) if it advised that the deal was acceptable. As a consequence, it was incentivised to say that the deal provided by the group was good.
This information was subsequently provided to the satisfaction of the court at a third hearing at which Snowden J granted an order to convene a meeting of scheme creditors. Snowden J’s written judgment addressed some important points:
- It was clarified that the financial advisor would not conduct “due diligence” for the ad hoc group in the sense in which that expression is ordinarily understood (i.e. being allowed direct access by the group to its unpublished financial information and records), but rather that the financial advisor would assist in negotiations with the company which are designed to improve the deal terms for the benefit of all noteholders.
- Snowden J was reassured by the willingness of the debtors to allow other noteholders to join the ad hoc group (subject to suitable undertakings on confidentiality and conduct), the fact that any improved terms achieved would be offered equally to all noteholders under an amended scheme and that any additional information (financial or otherwise) provided to the ad hoc group would be provided to all noteholders by way of supplement to the explanatory statement. While the potential success fee was considered unusual, Snowden J noted that the ad hoc committee were fully aware of its existence and consented to it. In addition, other noteholders would be made aware of such fee by way of disclosure in the explanatory statement. The existence of the fee did not give rise to any class questions.
- The convening hearing judgment also confirmed that where there are concerns that inadequate notice has been given to scheme creditors before a convening hearing, the judge may allow the scheme to proceed, provided that scheme creditors can raise any issues at sanction hearing.
Note: the impact of fees, including consent fees, work fees and commitment fees and their impact on class constitution and fairness will require careful thought and have been the subject matter of numerous important scheme cases. On the one hand, substantial fees paid to a single or limited body of creditors which only benefit the recipient are likely to require strong justification. Large contingency fees and those which fall outside the usual contractual cover provisions payable to advisers will also need careful thought, although of course such advisers are providing a service. However, fees which are made available to other creditors or which benefit the wider class of creditors generally, for example, because the ad hoc group are assisting the company in driving forward the restructure for the benefit of all creditors or because a body of creditors is providing some additional benefit, for example, committing to provide a backstop to a new money offer, should continue to be justifiable, although it is clear that each case may turn on its facts.
The sanction hearing will take place in the near future.
Reorg Research's application for access to witness statements
In a subsequent judgment in the same scheme case, Snowden J allowed Reorg Research's request to be provided with copies of the witness statements relied on by the scheme company in its convening hearing application despite opposition from the scheme company. Reorg Research relied on the Supreme Court case of Cape Intermediate Holdings Ltd v Dring which set out the applicable principles of open justice. At heart was Reorg's interest in the fee arrangement which the group entered into with the financial advisor to the ad hoc group and that contrary to the evidence of the company, the judge's view that this was not, as far as he was aware, market standard. Reorg Research argued that this would advance the open justice principle not only so that it could make scheme creditors aware of the genesis and reasons for the proposal but also to make other trade creditors and lenders to the group aware as the payment of fees would reduce the funds of the group to service debt. Reorg also submitted that access to greater detail in the evidence will provide guidance to other proponents of schemes and plans in the future "as to the type of fee arrangement which is now acceptable".
This means there is likely to be higher scrutiny both judicially, and in the market, in terms of how fees are structured.
This also raises interesting questions as to whether the court will make the orders in, for example, Virgin Atlantic and Pizza Express based on confidentiality concerns, requiring those seeking access to the court file to notify the relevant company in advance. The question of whether there is any risk of harm by disclosure is part of the balancing exercise in Dring. The issue of confidentiality was not addressed in the Reorg application as the scheme company did not contend that the information was confidential or that its disclosure was harmful.
Schemes and plans continue to be a popular restructuring tool for all types of companies and international groups.