Introduced by the Corporate Insolvency and Governance Act 2020, the restructuring plans regime set out in Part 26A of the Companies Act 2006 (Plans) has quickly proven a popular route for corporate financial rescue. This is in large part due to the fact that it allows for a plan to be imposed upon dissenting creditor classes in certain circumstances. This is known as "cross-class cramdown".
However, given the draconian nature of the cross-class cramdown, there have been a number of challenges to proposed Plans which involve a cross-class cramdown. In February 2024, the Court of Appeal considered this for the first time (Re AGPS Bondco Plc [2024] EWCA Civ 24). Since then, there have been two further decisions applying and expanding upon the principles laid out in AGPS Bondco: Re Project Lietzenburger Straße Holdco S.À.R.L. [2024] EWHC 468 (Ch) and Re CB&I UK Ltd [2024] EWHC 398 (Ch).
It appears likely that further challenges will be mounted by dissenting classes as the relevant legal and procedural principles are worked out and applied in different scenarios. For example, an application for additional disclosure was made in relation to the C-Retail Ltd Plan and creditors seeking to challenge a plan proposed by Consort Healthcare (Tameside) plc have secured an order that the plan company provide security for costs in relation to the Plan proceedings.
In this article we look at the key points arising from the Court of Appeal's decision in Re AGPS Bondco and how these have played out in subsequent decisions. We also look at the further issues that were addressed in Re Project Lietzenburger Straße Holdco S.À.R.L. and Re CB&I UK Ltd. Finally, we look at novel uses of the Civil Procedure Rules in Consort Healthcare and C-Retail Ltd. We then wrap up with some general conclusions on what these decisions say about Plans generally.
Cross-class cramdown
Under s. 901F of the Companies Act 2006, the court can approve a Plan provided that 75% of the creditors voting on the plan approve it.
This is subject to s. 901G. This provides that where less than 75% in value of a particular class of creditors (or members) of the company approve the Plan (the Dissenting Class), the court can only impose the Plan on the Dissenting Class if the following conditions are satisfied:
- Condition A – if approved, none of the Dissenting Class would be worse off under the terms of the restructuring plan than they would be under the "relevant alternative" (referred to as the "no worse off test");
- Condition B – the plan has been approved by 75% or more in value of a class of creditors that "would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative".
The "relevant alternative" is defined in s. 901G(4) as "whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under s. 901F".
Re AGPS Bondco Plc [2024] EWCA Civ 24
In Re AGPS Bondco, the company sought to restructure its liabilities under a series of loan notes with different maturity dates. The Dissenting Class consisted of the creditors holding the notes with the latest maturity date (ie which would be paid out last assuming the notes were paid out in order).
At first instance, the Judge concluded that the two conditions contained in s 901G of the Act were met and exercised his discretion to approve the Plan and cram down the Dissenting Class. The dissenting creditors appealed this decision on eight grounds, a number of which were upheld by the Court of Appeal.
The test to be applied
The appeal focused on the way in which the court should exercise its discretion when considering whether to exercise its discretion to sanction a Plan when there is a Dissenting Class. The Court of Appeal held that the court should consider both a "vertical" comparison (ie a comparison between the Plan and the "relevant alternative"), and a "horizontal" comparison (ie a comparison of the way in which each class of creditors is treated under the Plan).
In relation to the horizontal comparison, the Court of Appeal held that the Judge at first instance had been wrong to place weight on the fact that: (i) the other classes had all approved the Plan; and (ii) a majority of the dissenting class (albeit less than the required 75%) had also approved the Plan. Snowden LJ held that "reliance upon the overall level of voting across all classes of creditors is not something that should be taken into account in conducting the horizontal comparison".
In relation to the vertical comparison, the Judge had also been wrong to place weight on the fact that the 'no worse off' test (under s.901G) had been met when determining whether to exercise his discretion as to whether to sanction the plan. As the Judge himself had noted, this test is "merely a jurisdictional requirement and did not give rise to any presumption that a plan should be sanctioned".
Bringing together the vertical and horizontal comparators, the Court of Appeal held that the court must "inquire how the value sought to be preserved or generated by the restructuring plan, over and above the relevant alternative, is to be allocated between those different creditor groups". Where this includes unequal treatment of different classes, such as a departure from the principle of pari passu distribution to creditors which would apply in the relevant alternative, there must be "a good reason or proper basis for that departure". For example, it might be appropriate to prioritise creditors that are willing to provide "new money" for the business. In this case the court was not satisfied that there was a good justification for departing from the pari passu principle. This was because the Dissenting Class' notes would still be paid out last, thus requiring them to take on a greater risk that they would not be paid out in full (or at all). The Court of Appeal also concluded that a court could consider whether "a fairer or improved plan might have been available". In this case, a fairer Plan was available, as the Plan could have shared this risk equally amongst the different noteholder classes by harmonising the repayment dates under the various note series.
Procedural points
The Court of Appeal also made some notable comments as to the process to be followed when seeking sanction of a Part 26A Plan. Albeit that these comments were obiter, they indicate further potential grounds of dispute, some of which have been touched upon in the subsequent decisions discussed below.
In AGPS Bondco, the Plan Company, an English company, had been set up specifically in order to gain access to the English insolvency regime, and Part 26A in particular. Snowden LJ noted that "the technique of inserting a newly incorporated English company as a substitute… in order to engage the jurisdiction of the English court… has been used in a number of schemes and plans that have been sanctioned at first instance over the last few years". The Part 26A Plan was not opposed on this basis, and therefore this issue was not substantively considered by the Court of Appeal. However, Snowden LJ noted that "without expressing a view one way or the other, I would wish to make clear that the fact that this judgment does not deal with this issue should not be taken as an endorsement of the technique".
The Court of Appeal also made comments as to timing. Whilst the court will attempt to be flexible, this should not be abused. Snowden LJ noted that "the sanction exercise [in AGPS Bondco] had been done to a timetable that was, for all concerned and especially the Judge, inadequate". He further commented that "in [some] cases, especially where the deadlines result from the entirely foreseeable scheduled maturities of financial instruments, the time pressures on the court process appear to be the result of the parties… running matters down to the wire". On that basis, Snowden LJ emphasised that:
"the court’s willingness to decide cases quickly to assist companies in genuine and urgent financial difficulties must not be taken for granted or abused. In particular, where a restructuring is designed to deal with the foreseeable maturity of financial instruments, and a division of the anticipated benefits of the restructuring is being negotiated between sophisticated investors, sufficient time for the proper conduct of a contested Part 26A process must be factored into the timetable."
Re Project Lietzenburger Straße Holdco S.À.R.L. [2024] EWHC 468 (Ch)
In this case, the court considered an issue that was not fully addressed in AGPS Bondco, but which was commented upon by Snowden LJ in obiter remarks.
Under s. 901A Companies Act 2006, the court will only have jurisdiction to consider and sanction a Plan if certain criteria are met. One of these, set out in s. 901A(3), is that under the Plan "a compromise or arrangement is proposed between the company and: (i) it's creditors, or any class of them…". In this case the Dissenting Class argued that this criteria was not met on the grounds that the Plan proposed to extinguish the debts owed to the Dissenting Class entirely, for no consideration. The Dissenting Class argued that this was therefore not "a compromise or arrangement" but, rather, the extinguishing of their rights.
In AGPS Bondco Snowden LJ commented, obiter, that his "provisional view" was that, the meaning of the words "compromise or arrangement" should require an element of 'give and take', as is well-established in relation to schemes of arrangement under Part 26.
In Lietzenburger, Mr Justice Richards agreed with this view. Further, he concluded that it was not sufficient that the Plan contained a "compromise or arrangement" with some classes of creditors – rather, "the proposal that is put forward must constitute a "compromise or arrangement" for every class of creditor or member to whom it is directed". Accordingly, he held that the proposed Plan did not meet the requirements of s. 901A Companies Act 2006, and therefore the court did not have jurisdiction to sanction it.
Although, having reached this conclusion, the Judge did not need to consider any of the other grounds of objection raised in this case, he nevertheless made some obiter comments on them. Of particular interest were his comments (reflecting Snowden LJ's comments in AGPS Bondco) on the argument that it would not be appropriate to sanction a Plan in respect of a foreign company that had moved its centre of main interest (COMI) to England in order to take advantage of Part 26A. The Judge rejected this line of argument. The COMI had genuinely been transferred, and the Judge was satisfied that the courts of any relevant foreign jurisdiction would recognise an order of the English court sanctioning the Plan.
Re CB&I UK Ltd [2024] EWHC 398 (Ch)
In this case, CB&I UK Ltd, part of the McDermott group, sought sanction for a Plan which, in its original form, would have effectively completely extinguished a US$1.3 billion arbitration award (the Award) in favour of one of its creditors.
In light of the decision in AGPS Bondco, the Plan Company asked to change the proposal to include a small payment in respect of the Award equating to between 0.02 and 0.4% of the total value of the claim. The dissenting creditor argued that this did not amount to a "compromise or arrangement". In the event, this issue was superseded but Mr Justice Green nevertheless held that "even if the £800,000 payment is very small by comparison with the total debt, as it is, I am satisfied that it is sufficient to pass the apparently low jurisdictional threshold for it to be a "compromise or arrangement".
The Judge also made a number of criticisms as to the way in which both the Plan Company and the dissenting creditor had approached the proceedings. The creditor in particular was criticised for failing to engage in a timely way with an offer that might have resolved the dispute. Meanwhile, the Judge commented that he was "horrified to discover that the Plan Company has spent around US$150 million on professional fees in negotiating with its secured creditors… and then putting forward the plan and taking it to a hearing", noting that "costs of that magnitude could be a barrier to the sort of restructurings that Part 26A was meant to encourage."
Consort Healthcare (Tameside) plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch) & Re C-Retail Limited [2024] EWHC 1194 (Ch)
In these cases, creditors seeking to challenge the proposed Plan sought procedural orders in support of their challenges that had not previously been considered in the context of Part 26A.
Consort Healthcare
In this case, a dissenting creditor sought an order that the Plan Company provide security for costs in relation to their costs of contesting the Plan.
Security for costs orders are commonplace in English litigation. However, no such order had previously been sought in relation to challenges to the sanctioning of a Plan. The Plan Company argued that Part 26A plan sanction proceedings were "fundamentally different" from "ordinary adversarial litigation" and, therefore, that such an order would generally not be appropriate. In particular, the Plan Company argued that the court should proceed on the basis that the Plan would be approved, and that as a Plan Company will inherently be in financial difficulties the court should be reluctant to give weight to that fact when considering whether to make such an order.
Mr Justice Richards disagreed. He held that the court is entitled to take into account all relevant circumstances when considering such an order. The Judge also noted that the Plan arose at least in part from an adjudication decision against the Plan Company, which the Plan would to some extent reverse. As such, the Judge considered that the plan sanction process was in a sense an extension of the commercial litigation between the parties. In these circumstances they were satisfied that "the present dispute relating to the plan [is] not that dissimilar to adversarial litigation".
The Plan Company also argued that the court should decline to exercise its discretion to order security for costs on the grounds that to do so might stifle the Plan Company's ability to use Part 26A to restructure. The Judge accepted that this was something to be taken into account. However, in this case, there was insufficient evidence that ordering security for costs would stifle the Plan Company's use of Part 26A to justify refusing to grant the order sought. Given that the Judge was satisfied that there was a material risk that the Plan Company would not be able to pay a costs order in favour of the dissenting creditor, the Judge ordered that it should provide security for costs.
C-Retail
In C-Retail, on the other hand, a creditor sought orders for specific disclosure under CPR 31.
The Plan Company in this case had cooperated with the creditor in order to narrow the scope of the request, and had agreed to a number of the requests, which the Judge, Mr Justice Norris, noted approvingly. The Judge held that the orders sought were ones which the court was entitled. Having reviewed the arguments, the considered would be appropriate to order some of the specific disclosures sought.
What do these cases tell us?
Cross-class cramdown is a powerful restructuring tool but, to quote Spiderman, with great power comes great responsibility. What these cases show is that if the power is not used fairly and responsibly by Plan Companies, dissenting classes will challenge and complex litigation will follow. The 2024 cases so far, described above, highlight a number of areas that may give grounds for a potential challenge and have given restructuring professionals an insight into the principles that the court will apply when exercising its discretion. They have also considered procedural issues, including timetabling, legal costs and disclosure. All such clarification from the courts assists distressed companies and their creditors (and their respective advisers) to understand the governing principles for the purposes of negotiations. For the time being, however, it seems likely that the sanctioning of Plans involving cross-class cramdown will continue to be a fertile ground for litigation, at least until the ground rules have been more fully established.