2024 started off with a hugely significant development for the emerging practice and use of Part 26A Restructuring Plans (RPs), with the Court of Appeal judgment in the case of Re AGPS Bondco plc (the Adler case).
The January ruling provided higher court authority on a number of practical and legal matters, clarifying the position for businesses and their advisers who are considering, pursuing or challenging RPs.
This article seeks to summarise some of the developments we have seen with RP case law post-Adler, highlight what we’ve learnt and areas where we may see further iteration of this important turnaround tool – both in case law and market practice.
Post-Adler adjustments
The first sanction rulings post-Adler were for two RPs, which had been put together prior to the judgment, so we saw some tweaking and adjustments to fit within the guidelines now set out by the Court of Appeal.
These were for CB&I UK Ltd (part of the McDermott Group, a large, multinational engineering and construction company) and Project Lietzenburger Straße Holdco S.À.R.L (part of the Aggregate group, a German real estate company).
Consideration of “out of the money” creditors
Earlier case law (e.g. Re Prezzo Investco Limited) had seen “out of the money” (OOTM) creditors – those unsecured creditors who would not receive any return in an insolvency situation – not offered anything as part of Plans and “crammed down” given that ultimately under the plan they would be “no worse off” and indeed likely better off than the relevant alternative (some form of insolvency event). Albeit obiter (meaning not forming part of the main judgment and not providing a binding precedent) Lord Snowden indicated in Adler that – in line with case law for Part 26 schemes of arrangement – in order for an RP to represent a “compromise or arrangement” and therefore be jurisdictionally valid, there must be some consideration (compensation) provided to the OOTM creditors, rather than simply the extinguishment of their rights. Adler also however indicated that such a payment might only be a “modest amount”.
In the first post-Adler ruling, in February, the level that had been offered to the dissenting creditor (Reficar) in the CB&I UK plan – a small fraction of the total debt – was considered sufficient to meet the requirement of being a compromise or arrangement – and the judge noted that it was “much greater” than Reficar’s share in a liquidation.
For the Aggregate plan, the company had offered no consideration to the OOTM creditors (the Subordinated Creditors). Therefore, in order to comply with the requirements following Adler, despite also arguing that this was non-binding – which in itself was given short shrift by Mr Justice Richards, the company amended the RP to offer a small amount to these creditors. The judge considered that due to the previous lack of consideration, there had been no jurisdiction at the convening hearing. He therefore turned the sanction hearing in March into a convening hearing, so that creditors would be able to vote on the new plan; then using section 901C(4) he excluded all except those with a “genuine economic interest” in the plan (the Senior Creditors who had overwhelmingly supported the original RP) from voting. The Amended Plan was duly voted for and then sanctioned at a new hearing scheduled just three days after what would have been the original sanction hearing.
Leasehold-heavy RPs
Following these large and highly contested RPs, the next round of sanction hearings came in the summer. These plans, for Tasty Plc– the owners of casual dining chains Dim T and Wildwood, the retail brand Superdry and bar and nightclub chain Revolution Bars focused largely – understandably given their real estate heavy sectors – on dealing with lease and related liabilities. This included exits, either immediately or at a future date, of unperforming sites or reduced rates paid to both landlord and local ratings authorities.
A further RP along these lines was pursued by Cineworld cinemas in autumn, sanctioned at the start of October, with garden centre chain Dobbies issuing its own RP in the same week.
The focus of these plans indicates the advantages of RPs in being able to right-size a company’s leasehold footprint whilst simultaneously addressing other aspects of the business, such as securing new money and strategic planning. These plans have been used for businesses in both the smaller mid-market, with Tasty plc reporting a turnover of just under £50 million for 2023, to larger businesses: an over £600 million turnover for Superdry in 2023 and Cineworld as a global cinema chain.
Novel approaches to RPs
In between leasehold-focused plans, there was a novel RP over the summer, with Consort Healthcare (Tameside) plc, a private company providing services to an NHS Trust under a private finance arrangement, seeking to use an RP to compromise an arbitration award that had been made in favour of the NHS Trust. The outlined plan also seeks to impact future liabilities due to the Trust and includes certain operational aspects. The company put forward essentially two proposed plans (the “Sustainability Option Restructuring Plan” and the “Settlement Option Restructuring Plan”) with the proposal that both creditors and the court would consider both options, but only one would be sanctioned.
In response, the NHS Trust made an application for security for costs to be provided by Consort, highlighting the risk to the Trust in the difficulty of it being able to recover its costs of opposing the RP should it be sanctioned. The application was accepted by the judge, though granting only 50% of the costs sought. The judge did however in his judgment on the application highlight the particular aspects of the Consort RP that meant it could be deemed as akin to a continuation of adversarial litigation between the Trust and Consort, rendering security for costs more appropriate. However, there are certain other RPs that have sought to deal with liabilities including arbitration awards so it raised a question of whether this will be considered by more creditors in future. Following the security for costs application, the company announced it could not meet this costs order and that the plan would therefore be stayed.
Further international Restructuring Plans
Bringing us at the time of writing up to date with issued RPs, the most recent plan filed is that of Ambatovy Minerals Société Anonyme, two mining subsidiaries headquartered in both Madagascar and the Netherlands of the ultimately Japanese Sumitomo Corporation. The company in its filing notice indicated that the plan would be used to address operational improvements, including issues with machinery assets. Another international company, Chinese-based Sino-Ocean Group Holding is also reportedly considering using an RP in parallel with a Hong Kong process.
Conclusions and where next
We can see a developing twin track approach in the types of businesses seeking to use Restructuring Plans for company rescue post-Adler, with a number of complex and multi-jurisdictional companies choosing to bring their restructuring plans to the UK – often also involving cross-jurisdictional or overlapping plans. This reflects the attractiveness of both RPs as a tool and the international reputation of the UK legal system and practitioners. These plans usually involve complex and multifaceted restructurings, and can see opposing expert evidence, disputed valuations and more extensive disclosure and sanction hearings, including cross-examination of witnesses. Post-Adler, we can see dissenting creditors relying on the comments in Adler, which stressed the importance of sufficient timeframes and disclosure for all creditors in their responses to RPs. For instance, a disclosure application by one of the impacted landlords in the Superdry RP, and the opposing arguments put forward by dissenting creditors in McDermott and Aggregate.
In light of some of these developments, some commentary has discussed whether RPs are coming to resemble more usual adversarial litigation. It may be the case that – particularly with the large and complex RPs – as RPs bed in and dissenting creditors become more confident in raising challenges, that we may see an increase in creditor applications surrounding these types of RPs However, we can see following Adler the greater clarity around how the court will approach its discretion and what it will take into account to sanction an RP, particularly when asked to exercise cross-class cram down. This also means some coalescing of areas of challenge, as well as a focus on outstanding areas not yet addressed fully in case law precedent.
This article is by no means a comprehensive outline of areas of focus or potential avenues for challenge. First, disputes are highlighting questions of fairness and whether there is a “better plan” possible, i.e. whether the value generated by the RP (“the restructuring surplus”) has been fairly distributed between different classes of creditors. This means more extensive thinking on the part of businesses and their advisors about whether they can improve their offers to creditors, even those who are out of the money, as opposed to just beating what they are considered likely to receive in the relative alternative.
We can see this with more iterative RPs and negotiations during the course of recent RPs. For instance, with the amendment of the Tasty RP post-convening hearing to provide an additional payment to all non-secured creditor classes, and the negotiations between the company and Reficar prior to and continuing alongside the sanction hearing for McDermott. This can also be seen in the conclusion of consensual negotiations between certain landlords and the company in both Superdry and Cineworld cases, and amendments in relation to strip out provisions in the Cineworld RP.
This approach is also reflected in increasing discussions between businesses considering RPs and creditors outside of an RP, as in the separate Time To Pay agreement reached with HMRC outside the Tasty RP, and separate agreements with Aviva and M&G in relation to particular leases outside the Cineworld plan. We can see increasing sophistication from creditors looking to challenge RPs, but this comes alongside realistic assessments of their relative positions and willingness to reach agreement where possible. Particularly for smaller and mid-market RPs, with less complex debt structures, post-Adler, there is now an evolved framework for RPs to work within, providing greater certainty for businesses that if they comply with the requirements set out in Adler they have a good chance of receiving court approval, as well as a greater steer for creditors looking at how to respond to such plans.
On creditor applications, the court has been keen to stress the fact-specific nature of some of these. For instance, given the distinctive background and nature of the plan for Consort Healthcare, the (partial) success of the security for costs application in this case looks unlikely to be usual practice for other RPs. In the recent Cineworld judgment, two landlords (UKCP and the Crown Estate) applied for injunctions removing their leases from inclusion in the RP on the basis that they had previously concluded renegotiations of particular leases and surrounding these negotiations there were agreements in letters from Cineworld that they would not seek further compromises of the leases in the event of a restructuring plan. The court did not accept this argument, noting that following Adler, where the relevant alternative was an insolvency process, the pari passu principle is the starting point and that departure from this principle in treating certain creditors or classes differently to others requires proper justification, in terms of “the preferential treatment or exclusion” being “likely to facilitate or promote the plan (by e.g. enabling the company to continue in business”. The judge here also reiterated the point made in Consort Healthcare that “each case turns on its facts”. It is worth noting that UKCP has been granted permission to appeal.
Other applications themselves demonstrate parties’ willingness to seek to narrow the issues taken before the court – as discussed in Adler – with for instance the company and applicant landlord in Superdry agreeing the disclosure request as far as possible and leaving only certain disputed documents for the judge to decide, as was noted approvingly in his ruling. Conversely, last minute creditors applications such as those made in the Cineworld case risk – without good reason for such delays – judicial rebuke as to why points have not been raised earlier i.e. at the convening hearing.
Further potential areas to be clarified could be assessments of where the court may draw the line in accepting certain technical mechanisms by which plan companies are constituted (often in order to demonstrate sufficient connection to England and Wales, or to neatly package liabilities), such as deed poll mechanisms, issuer substitutions and so on. These have so far been accepted by the court but have caused some disquiet amongst certain creditors, and it could be that these become a stronger focus of challenge depending on the nature of future RPs. We may see new sectors seeking to utilise RPs, for instance further PFI contractors or the rumoured consideration of a Restructuring Plan by Thames Water, which may further clarify the courts’ position on how certain public interest creditors are treated.
In the meantime, we can see steady numbers of businesses across sectors, and of sizes large and relatively smaller, continuing to take advantage of this powerful company rescue tool to adjust their financial position (and often operational issues alongside) and seek a return to growth. It is also worth noting that the overall purpose of RPs supports the more collective “interest of the creditors generally in eliminating or mitigating the financial difficulties which are or may be affecting its ability to carry on business as a going concern” (Cineworld judgment, para. 129). In the longer term the ultimate goal is to support viable businesses and therefore creditors and the economy more generally as the Restructuring Plan comes of age.
