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Adler Group – Court of Appeal sets aside a debt restructuring plan

Adler Group – Court of Appeal sets aside a debt restructuring plan

Overview

The Court of Appeal has ruled that the previous decision of the High Court to sanction a restructuring plan ("Plan") that had been proposed by the Adler Group ("Adler") should be set aside. The decision marks the first appeal in relation to a restructuring plan under Part 26A of the Companies Act 2006 ("Companies Act") and the decision offers clarity on the approach to restructuring plans, particularly when considering issues of "fairness".

For further details on restructuring plans and how they work in practice, please see our previous updates linked below.

The Plan sought to, amongst other things, stagger the maturity dates of six series of senior unsecured notes totalling EUR 3.2 billion (the "Notes") between 2024 and 2029. The Plan was approved by all but one class of noteholders. In the dissenting class, a simple majority was achieved but the vote did not reach the required 75% value majority. In sanctioning the Plan, the High Court exercised its power to invoke a "cross-class cramdown", so as to bind the dissenting class of noteholders to the terms of the Plan. An ad hoc committee of the dissenting noteholders sought to appeal that decision. 

In finding that the High Court's decision to sanction the Plan should be overturned, the Court of Appeal concluded that there was no reasonable justification for staggering the maturity dates of the notes. The key element to that decision was that the Plan would have resulted in a divergence from the pari passu treatment of creditors. The pari passu principle seeks to ensure that, in an insolvency, the unsecured creditors of a company will share equally in any available proceeds and in accordance with the proportion of the debt due to each creditor. The relevant alternative to the Plan was an insolvent wind down governed by German law, in which the obligations under the Notes would have ranked equally as unsecured debts, thereby honouring the pari passu principle.

Adler had argued that the amendments proposed under the Plan reflected the commercial expectations of the noteholders. However, the Court of Appeal did not see any reasonable justification for the divergence from the pari passu principle under the Plan, which would otherwise have been observed in the relevant alternative. The Court of Appeal was of the view that, in circumstances where it is necessary to consider the application of "cross-class cramdown", a restructuring plan should not receive sanction in the absence of a reasonable justification for the departure from the treatment of creditors' rights on a pari passu basis. Adler had further argued that the dissenting noteholders would likely be paid in full in the future under the Plan, whereas payment in full was not certain in the relevant alternative. The Court of Appeal was not convinced and noted that future payment was not "risk free", particularly for the notes with the longest extended maturity dates, and that any question as to what outcome was more likely remained inherently uncertain. 

The Court of Appeal provided further clarity on a number of issues that judges must have regard to in considering whether to sanction a restructuring plan:

  • It was confirmed that the test for considering whether to sanction a restructuring plan should be the same two-part test that is applied when considering whether to sanction a scheme of arrangement under Part 26 of the Companies Act, subject to the necessary amendments in relation to cross-class cramdown.

    • If cross-class cramdown is not in consideration, as all classes have voted in favour of the plan, the courts should apply the test of rationality and consider whether it was rational for creditors to have voted in that manner.
    • If considering whether to apply cross-class cramdown, on the basis that one or more classes have not voted in favour of the plan, a different test must be applied at the sanction hearing and the court should have regard to a number of additional considerations. In relation to assenting classes, and considering whether it is appropriate to bind any dissenting voters within those classes, the rationality test remains appropriate. However, in relation to dissenting classes, the rationality test alone is not appropriate.

  • It is not appropriate for the court to rely on views of the assenting classes in order to impose a plan on dissenting classes. The rights of the classes are inherently different. A judge may look to the views of the majority of a dissenting class, but this should not go so far as to undermine the 75% legislative voting threshold.

  • Satisfaction of the "no worse off" test does not necessarily result in a presumption in favour of a cross-class cramdown.

  • The court should have regard to the position of the class in question as against other classes (the horizontal comparator). Where a plan differs in treatment to certain creditors, that difference must be for good reason and should be properly justified. The example of the payment of necessary trade creditors in priority to lenders providing additional funding was given, but it was noted that this consideration should be highly fact sensitive.

The Court of Appeal also offered guidance as to the correct procedure to follow in relation to restructuring plans:

  • The appellants had requested that the appeal be expedited. Whilst they were granted permission to appeal, the application for expedition was refused. It was recognised that courts should always be prepared to act swiftly and decisively when a genuine need arises, but that any requests for the court to do so must be justified. Although, in restructurings, time is often of the essence, the Court of Appeal noted that there is a distinction between foreseeable and predictable restructuring timelines and those timelines that are driven by external factors which are outside of the control of the parties. Where a timeline is reasonably predictable, for example by reference to facility maturity dates, if the company, the creditors and their advisors do not give the court sufficient time to adjudicate fairly on the proposals, they should not complain if the court considers it necessary to adjourn the case in order to properly consider the facts and arguments put before it. 

  • The Notes had initially been issued by an entity incorporated in Luxembourg. Adler had incorporated an English company (the "Plan Company") and had taken steps to substitute the Plan Company as the issuer of the Notes. In introducing an English entity to the group structure, Adler had sought to engage the jurisdiction of the English courts in relation to the Plan. The Court of Appeal recognised that this approach had been taken previously in relation to a number of schemes of arrangement and restructuring plans and that those schemes and plans had been sanctioned at first instance. The issue of substitution, and whether it can justify the exercise of jurisdiction by the English courts in a restructuring, has not yet been considered at an appellate level. It was not argued before the Court of Appeal in this case and therefore not addressed in the judgment. The judge did note that the lack of consideration in this case should not, of itself, be taken to amount to an endorsement of the approach by the court. The matter therefore remains an open point for discussion. It was also noted that jurisdictional matters should not, if possible, be postponed to the sanction hearing.

Links:

https://www.traverssmith.com/knowledge/knowledge-container/the-corporate-insolvency-and-governance-act-2020/

https://www.traverssmith.com/knowledge/knowledge-container/are-recent-sme-restructuring-plans-paving-the-way-for-a-more-cost-efficient-process/

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