The restructuring plan has so far proven to be a powerful tool to facilitate restructurings of complex capital structures. Two recent cases provide further helpful guidance for advisers when formulating a restructuring plan and for investors who may be affected by its terms.
Amicus Finance plc (in administration) ("Amicus")
Amicus involved the first restructuring plan proposed by an insolvency officeholder. The plan sought to facilitate the rescue of the company as a going concern and provided for the compromise of the senior secured creditor class. The plan proposed the compromise of approximately £32 million of claims, demonstrating that the restructuring plan is a viable tool for distressed debtors in the mid-market. The case considered the standard applicable to facilitate a "cram down" of dissenting classes and the requirements in respect of disclosure of information to creditors. The Amicus scheme was sanctioned by the court on 19 August 2021, with a reasoned judgment handed down on 15 November 2021.
"No worse off" test
A court may exercise its discretion to sanction a restructuring plan where one or more creditor classes has voted against it, provided no member of the dissenting class(es) would be any worse off than they would be in the event of the relevant alternative (i.e. whatever the court considers would be most likely to occur if the plan were not sanctioned). The relevant alternative will depend on the circumstances - the court does not need to find that an alternative would definitely occur, just that it is most likely to occur. In Amicus:
- Crowdstacker (the dissenting senior secured creditor) argued that the "no worse off" test was not met, because Amicus’ estimated outcome statement undervalued recoveries in a hypothetical immediate liquidation (the relevant alternative). They argued that the administrators had to demonstrate that there was "no real prospect" or "no realistic possibility" of a better outcome. However, the court noted that it is for the administrators (as proposers of the plan) to demonstrate, on the balance of probabilities, that the senior secured creditor would not be better off in the relevant alternative.
- Crowdstacker also argued that liquidation recoveries were undervalued, as there were certain antecedent transactions that could be pursued. The court noted that investigation and potential prosecution of claims would incur expense and occasion delay (comparing unfavourably with the timing of payments under the plan). If there are serious avoidance claims which would have yielded a return, then the Joint Administrators would have been in breach of duty in ratifying certain transactions immediately upon appointment and/or would thereby have unfairly harmed the interests of creditors. Importantly, the scheme explicitly preserved the right of a compromised creditor to pursue claims against the administrators under paragraphs 74 and 75 of Schedule B1 to the Insolvency Act 1986.
The court also considered the adequacy of disclosures made to creditors and noted the key question is whether what was in fact provided was sufficient to enable to the creditors to make an informed decision. In relation to plans proposed by insolvency practitioners the court noted "it is not enough for office-holders simply to state their conclusions as to the estimated outcome and implicitly to invite creditors to assume that because they are professionals that they will have got it right."
Smile Telecoms Holdings Limited ("Smile")
Advisers are monitoring the plan proposed recently by Smile (a Mauritius-incorporated company) with interest as it proceeds through the courts. The written judgment from the convening hearing, which took place on 12 January 2022, has not yet been published (our initial observations here are based on the oral judgment and related reports). The creditors' meeting is set for 10 February, with the sanction hearing scheduled for 17 February.
Exclusion under s901C(4)
At the convening hearing, the court, for the first time, exercised its power under s. 901C(4) of the Companies Act 2006 to exclude the company’s members and all but a single class of creditors from voting on the plan. Section 901C(4) provides for an exemption from the general rule requiring every creditor or member of the company whose rights are compromised by the plan to be permitted to participate in a meeting convened with court approval, in circumstances where the court "is satisfied that none of the members of [a] class has a genuine economic interest in the company".
- The court was satisfied that only one creditor class had a genuine economic interest and based on the evidence this was not "a marginal case". The court relied on detailed valuation evidence as well as a robust M&A process as a basis for its decision.
- Creditors had been given adequate notice (approximately one month), with extensive financial information and therefore had the opportunity to formulate a challenge. When seeking to invoke s.901C(4), practitioners will need to ensure that relevant information is shared in good time and is sufficiently comprehensive.
- Exclusion on grounds of "no economic interest" is a high bar and the court may refuse to exercise its discretion if the valuation evidence presented is insufficient to form a decisive view, where there is a tight timetable or inadequate notice has been given to excluded creditors that would prevent them mounting a proper challenge or where there is an early challenge from the excluded class. If there is uncertainty, or in "marginal" cases, the court may require meetings of each relevant class, even if a number of classes are ultimately "crammed down".
Compromise of rights of members of a foreign company
Advisers will also be monitoring the treatment of jurisdictional issues at the sanction hearing, given that the Smile plan involves the compromise of the rights of members of a company incorporated outside of the UK. The law of incorporation of a company will typically regulate its shareholders' rights and so the ability of a restructuring plan to affect such rights could be very significant. While definitive judgment was deferred to sanction, where the court will have the benefit of expert evidence on jurisdiction and recognition, the court provided some interesting commentary at the convening stage.
Smile's shareholders have so far not sought to challenge the plan. A creditor seeking to challenge the plan relied on a comment from the 2004 Re Drax Holdings scheme of arrangement case appearing to rule out the possibility of a scheme affecting the rights of members of a foreign company, to argue that the restructuring plan was therefore defective. However, the court noted that Drax involved a solvent scheme and may not apply directly to a restructuring plan (which has a "financial difficulties" entry requirement). Counsel for Smile noted that its COMI is in England and this will be important in satisfying the "sufficient connection" requirement in relation to jurisdiction. Counsel also confirmed that at sanction expert evidence would be provided supporting the position that the restructuring plan is likely to be recognised in Mauritius. Counsel for Smile's super senior creditor, who supported the plan, noted that it would be an unfortunate and unhelpful restriction on the scope of a restructuring plan if it were never possible, as a matter of jurisdiction, to promulgate a plan in respect of a foreign company which dealt with both debt and equity given that the English Courts may, due to the Gibbs rule, be the only place where English law debt entered into by a foreign company can be effectively restructured. More to follow on this point in due course!