Recent cross-border uses of Part 26A Restructuring Plans

Since the Corporate Insolvency and Governance Act 2020 entered into force, case law relating to its Part 26A provision has seen a number of large businesses with international footprints take advantage of this UK-based restructuring tool.

This article looks at some of the recent uses of Part 26A Restructuring Plans (RPs) in the cross-border context, novel elements within their RPs and looks at what these cases might mean for future RPs.

Setting aside recent RPs by large businesses with international footprints, but where these were either UK-founded and headquartered (Superdry and the upcoming Petrofac and Waldorf Production RPs) or where the RPs themselves were a result of and due to specific UK-limited issues (Cineworld, Liberty Steel for its UK subsidiary Speciality Steel UK Ltd), there have been two recent international Restructuring Plans that have been sanctioned (Ambatovy and Sino-Ocean).  (This article also does not address Thames Water’s RPs which again is UK-based, albeit with a large degree of international investment).

Ambatovy Minerals Société Anonyme and Dynatec Madagascar Société Anonyme

These two interlinked RPs covered two mining companies, both based in Madagascar. Not only were these the first RPs for businesses based in the Malagasy jurisdiction, but there was also a further international element in that both of the companies were ultimately owned by Japanese and Korean corporations – the Sumitomo Corporation and the State of Korea-owned KOMIR corporation.

The cases bring to the fore the advantages of Part 26A, notably the cross-class cramdown, as a tool for company rescue with wider economic benefits:  the judge in the case noted that outputs from the Ambatovy mine that the Plan Companies operate represent roughly a quarter of exports from Madagascar.

Having previously completed three consensual restructurings of the companies’ debts, continuing and increasing losses necessitated both further money from shareholders (to the tune of US $140 million) and the reduction or cancellation of circa US $2.3 billion of debts.

In terms of the international dimension of the RPs and the use of an English tool, the judge at the convening hearing highlighted that this is now a well-established practice: “in a number of recent cases a sufficient connection has been found solely or principally in the fact that the rights of the relevant creditors were governed by English law, with the English courts having an exclusive or non-exclusive jurisdiction in respect of disputes…the Plans concern liabilities under contracts governed by English law and conferring at least non-exclusive jurisdiction on the English Court (save in one case, where there is an arbitration clause which specifies England as the arbitration seat)” [paragraphs 59-60 of convening judgment]. The judge also noted expert evidence indicated that the RPs would likely be recognised and given effect under Malagasy law.

The relevant alternative was said by the Plan Companies to be an insolvent liquidation, with dire consequences for the economy of Madagascar.  In terms of the structure of the Plans, it involved new money provision from the shareholders (of the necessary US $140 million), but only if the companies’ financial debt was discharged: “Standing back from its details, the result of the Plan is the complete removal of all third-party lenders, leaving its shareholders (who have been the principal funders in the past and have sponsored the Plan in their capacity as Super Senior debtholders) with 100% of the equity” [para. 40 of sanction judgment].

What did creditors think?

Unsurprisingly, the RPs saw a robust challenge by certain creditors, necessitating two convening hearings and further negotiations between the Plan Companies and these in between the two, with the Plan Companies providing an additional payment to these creditors (the Senior Lenders and the Recovery Financing Lenders).

The judge highlighted the lack of alternative evidence presented by creditors, and the fact that the only creditor who voted against the plan (KEXIM, also owned by the State of Korea) had not elaborated on their reasons for doing so – and had done so slightly puzzlingly given that simultaneously another Korean state-owned corporation was promulgating the RPs.

The Senior Lenders had disputed the companies’ evidence and argued that they would receive a higher return and be better off in the relevant alternative. Meanwhile, both the Senior Lenders and Recovery Financing Lenders had objected to the super priority status achieved by the Shareholders, enabling them to “cramdown” other creditors’ debts: “The allegation appeared to be that the Plan Companies and the Shareholders had in early 2024 conspired to artificially create a “cramming” class through the creation of the Super Senior Debt” [para. 103 of sanction judgment].

The judge considered that it was understandable that, given the financial straits and risks faced by the company at that point, that the shareholders/sponsors had insisted on Super Senior Status and accepted that the companies had needed this money, and the shareholders had been the only actors willing to provide this funding.  He did not consider that there had been contrivance to create a cramming class, again noting that at the sanction hearing that “no reasoned opposition to the Plan was advanced” [para. 107].

Fair or not? 

In more detail the judge considered questions of fairness in light of the vote against by KEXIM, in particular the weight the court should give to dissenting creditors who are “out of the money” (OOTM).

Referencing the Court of Appeal judgment in AGPS Bondco plc (Adler), the judge considered that while what he described as the “personal” (an OOTM creditor’s objections of the fairness of an RP or complaints in relation to how the benefits of the restructuring have been distributed) should be given “negligible weight” there is an “overriding” requirement for the court to consider “whether there has been a fair distribution of the restructuring surplus”, including in the round, the treatment of the dissenting creditors. In doing so he considered that the key question is “whether any value disparity is unfair” and in his mind this included “a consideration of the risk also undertaken by the recipients of it, and whether the bargain they are driving is disproportionate and unfair in all the commercial circumstances” [para. 121 of sanction judgment].  Ultimately the judge considered that the – albeit small – cash payment and the possibility of out of the money creditors sharing in potential upside via a Deferred Payment Mechanism was sufficient to provide sufficient “give and take” and render the plan not unfair.

Sino-Ocean Ltd

The second recent case with cross-border elements was that of Sino-Ocean Ltd, which was incorporated in Hong Kong, but was also the ultimate holding company of a Chinese property developer. With recent difficulties in the Chinese real estate market the company had already defaulted on its debts and was facing creditor enforcement action.

The Part 26A Restructuring Plan was part of cross-jurisdictional matters with a parallel scheme in Hong Kong, as has previously been the case with other RPs.

The company structured the Plan Creditors into four different classes (A to D) and sought to release creditor liabilities in return for “the issue of a package of new secured debt instruments and convertible securities” [para. 7 of convening judgment]. The exact packages and terms differed across the A-D classes, in line with the company’s analysis of what the different creditors would be likely to receive in the relevant alternative (which was considered an insolvent liquidation).

An interesting feature of the RP was the fact that the Shareholders were not included as a Plan Class to vote on the RP, which was queried by the judge at the convening hearing, though he concluded that if the Plan Company had made the decision that it did not need to bind its shareholders into the plan it was not for the court to do so “unless their not being so bound poses a threat to the viability of the Plan” [para. 33 of convening judgment].

What did creditors think?

In terms of objections to the RP, these were primarily outlined by one of the creditors, Long Corridor. Jurisdictionally, this related to the Class A debt being governed by Hong Kong law (hence the interrelated HK scheme). Long Corridor argued that the Class A creditors had “no nexus with the UK” [para. 41 of convening judgment] and queried their inclusion in the English Plan. Long Corridor also queried the differing arrangements for the A-D creditor classes as all the debts were unsecured and argued that the retention of a substantial degree of equity by the shareholders – in a circumstance where they were providing no new money – was unfair. It argued that the relevant alternative was not a liquidation but “some other Plan” [para. 21 of sanction judgment] that would provide Plan creditors with a greater share in the equity and dilute existing shareholders’ equity to a much larger degree.

It was also their argument that the Class A creditors had only been included within the RP to artificially create a class of creditors that were in the money and able to cram-down the other classes of creditor. Citing the established rule in Gibbs, Long Corridor argued that the Class A Debt compromise under the Hong Kong scheme would be effective both in Hong Kong and the United Kingdom and that “a compromise of Hong Kong debt under English law will not be given effect outside of the jurisdiction – except to the extent that creditors have submitted to the jurisdiction of the English court” [para. 36 of sanction judgment]. The judge disagreed with this, arguing that the Class A creditors’ rights were affected by the RP and they were entitled to consider and vote on the Plan. He also noted that the rule in Gibbs was not absolute where creditors are deemed to have submitted to a foreign insolvency proceeding, and he considered that voting on the plan was sufficient to represent submission by Class A creditors to the jurisdiction of the English courts. They had also signed up to a Restructuring Support Agreement to support the plan, but a minority of Class A creditors who had not done so or voted necessitated the Hong Kong scheme to ensure these were also bound by the restructuring.

The judge cited a number of other RPs where secured creditors in particular have been included in RPs where a deal has been reached with all or a substantial majority of the members of that class to support the plan, and the inclusion of this class in the plan enabling a cross-class cram down did not “mean that the inclusion of the assenting class in the plan is artificial or unjustified. If the position were otherwise, then Part 26A would be deprived of its intended purpose.” [para. 48]. He stated his view strongly as follows: “In my view, there is nothing artificial, and no whiff of impermissible forum-shopping in the constitution of the Class A creditors as a class of creditor in the Plan… If Long Corridor’s contention on this point were to be accepted, this would militate against the will of Parliament in adopting Part 26A CA 2006, in that it would deny companies that were operating internationally the ability to deal holistically with the different classes of their creditors in accordance with Part 26A if they had classes of debt in a jurisdiction like Hong Kong where some separate scheme was needed to ensure that all those debtors were to be included. In fact, the use of foreign schemes or plans to assist with the effectiveness of an English scheme or plan is commonplace.” [paras. 49-51].

The judge considered that the only unprecedented aspect of the case was the fact that the Class A overseas debt ranked pari passu with the other debt and was acting as a cramming class. He acknowledged that while usually debt ranking pari passu “would be offered the same consideration in the restructuring plan and would form a single class” and in this case there were good reasons for the company differentiating between the classes and offering different consideration to reflect “a similar multiple” [para. 53] of the returns the different creditors would receive in the relevant alternative. Long Corridor also criticised the inclusion of an affiliate of the shareholders in the Class C creditors (which was the decisive vote to reach the required 75% threshold in that class, which was also acting as a cramming class), but the judge accepted evidence provided by the company at the sanction hearing that the vote in favour had been on the basis of the best interests of the affiliate’s client who held the Class C notes, and in accordance with a strict conflicts of interest policy.

Finally, Long Corridor sought to argue somewhat late in the day that the shareholders needed to be included given the dilution of shareholdings due to the issuing of new instruments in the plan. However, the judge distinguished Sino-Ocean from the previous case of Hurricane Energy where the plan disapplied the rights of shareholders under the plan company’s articles, whereas here the RP did not disapply any of the ordinary rights of the shareholders under the company articles and did not itself bring about the issue of the new instruments – the mandatory convertible bonds (MCBs).  The MCBs were created by the Plan Company through a separate act, which had been authorised by the shareholders at an EGM and did not directly dilute the value of existing shares.

Fair or not?

Again, similarly to Ambatovy, the judge considered issues of fairness in relation to the shareholders under the RP continuing to hold a substantial percentage of shares, when they would receive nothing in the relevant alternative.

In Sino-Ocean however, there was a distinctive justification given for this disproportionate treatment of the shareholders.  The plan company argued that it was important that its two biggest shareholders, China Life and Daija Life Insurance (“the SOE Shareholders”), which were ultimately state-owned by the People’s Republic of China, should continue to hold at least 15% each so that the plan company could continue to be classed as a state-owned entity, with associated advantages including in relation to raising debt, planning etc – particularly lower interest rates. The judge considered this a proper basis for departure from pari passu treatment, though arguments raised at the sanction hearing did lead to the SOE Shareholders providing an undertaking that they would retain their shareholdings for a minimum period of two years after the Restructuring Effective Date as set out in the RP.

Key takeaways across the cases and looking forward

International use of RPs

Recent RPs have confirmed the international utility of RPs across an increasing range of companies and jurisdictions as well as RPs including novel elements, provided these align with questions of fairness now well-established by Adler and subsequent case law. Judges in recent cases have remained unwilling to entertain challenges related to allegations of “forum-shopping” or to increase jurisdictional bars for international companies to make use of the tool, to the UK’s advantage as a venue for international restructuring. We continue to see this with new recently launched RPs including for Enzen, a global engineering consultancy for the energy sectors founded in India, and another for Bermuda-based Madagascar Oil Ltd.

Creditor challenges

These plans both emphasise that creditors seeking to object to a Restructuring Plan need to effectively “pay to play”:  setting out the substance of their objections at an early stage, properly evidencing challenges that involve an alternative assessment of the relevant alternative or assertions that there could be an alternative RP. The judge in Ambatovy highlighted that the opposing creditors had not clearly set out what the alternative to insolvent liquidation might be, nor provided any alternative evidence. In Sino-Ocean the judge gave relatively short shrift to Long Corridor’s argument that there could be an alternative plan given the lack of evidence that creditors in this case were willing to take equity, whilst also criticising their alternative expert evidence (covering issues relating to valuation and interest rates according to the company being deemed state-owned or privately-owned) as being mainly based on textual analysis and academic rather than market-focused.

The plans also highlight increasing flexibility and negotiations occurring during the course of an RP, with opposing creditors in both RPs able to secure concessions in terms of cash payments or potential upside sharing (Ambatovy), or in terms of guaranteeing that the shareholders (who were disproportionately advantaged under the RP) continued to support the company by retaining their shares for a minimum period (Sino-Ocean).

Smaller and mid-market companies may be heartened that the above could mean that creditors think carefully about whether they have the means and proper arguments to mount formal challenges when faced with an RP where such challenges need to be worked through properly in circumstances akin to litigation, while also being wary that they will need to address and respond to legitimate concerns that are raised, which may involve additional offers to recalcitrant creditors.

Fairness of plans

These recent judgments have further clarified the court’s views on the fair distribution of the benefits of a restructuring, with the overriding lesson being that the court will consider the fairness in the round, including of out of the money creditors, to ascertain whether or not any particular creditor is getting too good a deal. They are a testament to the sophistication of the UK judiciary. Helpfully for shareholders (and indeed for new parties providing new money), these latest judgments have continued to confirm that retention of equity by shareholders (or an equity share/super-senior status for new providers of funding) is justified where they are providing new money, and indeed could be justified even where the shareholders are not providing new money if – in particular circumstances, such as with state-owned entities – there are other advantages accruing to the company that justify retention of equity.