The much-anticipated judgment of Lord Justice Snowden was handed down today in the Court of Appeal in relation to the Adler Group restructuring plan (the plan). In what may come to be a watershed moment for proponents of restructuring plans, the appeal by dissenting noteholders was allowed - and the order sanctioning the plan set aside.
The plan was proposed by AGPS Bondco plc (plan company) - an English incorporated subsidiary of Adler Group SA - and was intended to bind its creditors under six classes of senior unsecured notes (notes). The plan had become effective following its sanction in the High Court on 12 April 2023.
This is significant as the first time an appeal in relation to the sanction of a restructuring plan pursuant to Part 26A of the Companies Act 2006 has been heard by the Court of Appeal. The judgment addresses important questions regarding the exercise of the court’s discretion in relation to the “cross-class cram down” power introduced by Part 26A.
The proposed plan
The plan related to six series of notes issued by the parent company, Adler Group SA (the parent). The various series of notes had maturity dates ranging from July 2024 at the earliest (2024 notes) to January 2029 (2029 notes). A previous attempt at consensual restructuring, by way of a consent solicitation procedure, had been rejected by 2029 noteholders. Due to the later maturity date of their notes, the 2029 noteholders were at most risk of non-payment under any potential restructuring – although in an insolvency procedure, they would rank equally with all other senior unsecured noteholders.
In order to avail itself of the Part 26A procedure to implement the proposed restructuring, the group incorporated the plan company in England, which was then substituted for the parent as issuer of the notes. Such an issuer substitution procedure (while somewhat artificial) is not itself unusual, having been adopted in several previous schemes and plans (including Re gategroup Guarantee which we discussed here).
The plan sought to make certain changes to the terms and conditions of the notes, in line with the previous consent solicitation proposals. The plan preserved the maturity dates (and therefore sequential payment) of the various notes (other than the 2024 notes). As a result, the 2029 noteholders would receive any payments under the plan at a much later date than noteholders with earlier maturity dates. The maturity date of the 2024 notes was to be deferred for a year to facilitate the restructuring, and in return for this the 2024 noteholders were to be given security, ensuring that they would be paid in priority to the other, unsecured, noteholders.
Cross-class cram down
S.901G enables the court to sanction a restructuring plan where one of the class meetings has not met the statutory majority of 75% by value in favour (the dissenting class), provided two conditions are met:
For the purposes of s.901G, the “relevant alternative” as defined in s.901G(4) is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned.
A separate class meeting was held for the holders of each series of notes. The plan was approved by the required majority of 75% by value in five of the six classes. However, it failed to achieve the required statutory majority in the meeting of 2029 noteholders (although it was approved by 62% of this class).
The judge at first instance found that the most likely outcome was that the holders of 2029 notes would be better off under the plan than in the relevant alternative, while recognising that they also bore more risk in the plan (of non-payment or significantly reduced payment) than other noteholders due to their later payment date. The judge exercised the cross-class cram down power given to the court by s. 901G of the Companies Act 2006, and sanctioned the plan notwithstanding the dissent of the 2029 noteholder class.
The 2029 noteholders appealed the judgment at first instance (notwithstanding the fact that the plan had already become effective). Among other grounds of appeal, the appellants argued that:
- The plan materially departed from the pari passu principle of distribution which applied in the relevant alternative, with no justification for such differential treatment. This created a materially greater risk of non-payment for the 2029 noteholders.
- In assessing the fairness of the plan as between assenting and dissenting classes, the judge had wrongly applied case law in relation to Part 26 schemes and held that he did not need to consider whether the plan could have been made better or improved.
- The judge had wrongly attached significant weight when exercising the cross-class cram down discretion to the overall approval of the plan by the assenting classes and by a simple majority of the 2029 noteholders.
The relevant alternative
A consideration of the relevant alternative is key to the conditions for exercise of the cross-class cram down power. It was agreed by the plan company and the appellants in this case that the relevant alternative would be insolvency proceedings - in England for the plan company and in Germany for the parent and remainder of the group. In both sets of proceedings the claims of all noteholders would rank pari passu.
However, the plan company and the appellants differed significantly on their valuation of the assets of the group, and therefore the likely economic outcome under the plan and the relevant alternative. The plan company’s valuation evidence was that all notes were likely to receive payment in full under the plan, compared to a likely return of 63% in the relevant alternative.
The appellants argued (based upon their expert evidence, which included significantly lower valuations of the group’s assets) that 2029 noteholders were likely to receive only about a 10.6% return, due to being paid out subsequent to other noteholders under the plan. This compared to a predicted 56.1% return in the relevant alternative.
The Court of Appeal decision
The appeal was allowed, and the sanction decision was overturned.
Pari passu distribution
With regard to the pari passu argument, Snowden LJ held that sequential payments to creditors from a potentially inadequate common fund of money was not equivalent to a rateable distribution of that fund – dismissing the argument of the judge at first instance.
Snowden LJ held that the court may still approve a Part 26A plan which departs from the pari passu principle which would apply in the relevant alternative, but only if there is good justification for so doing. For instance, creditors who provide new money or some other benefit to assist in the achievement of the restructuring may be entitled to priority or some enhanced return. However, in this instance (save with respect to the 2024 noteholders) there was nothing to justify a departure from the pari passu principle. In fact, the plan could easily have been made fairer and respected pari passu distribution by harmonising the maturity dates of the different notes.
However, the extension of the maturity date of the 2024 notes was reasonable justification for the priority given to the 2024 noteholders’ claims by the granting of security, and Snowden LJ concurred with the Judge at first instance that this particular departure from the pari passu principle was not unfair to the 2029 noteholders.
Should the court consider possible alternative plans?
As to whether it was the role of the court to consider whether a better or fairer plan might have been available, Snowden LJ found that the judge at first instance was wrong not to consider whether a different allocation of benefits would have been possible under the plan.
In exercising its power of sanction in relation to a Part 26 scheme, the court is concerned to consider whether the scheme is a fair one which a creditor could reasonably approve – the court does not concern itself with questions as to whether the proposed scheme is the only fair scheme or the best scheme in the circumstances. In a scheme, the court is concerned with whether it is fair to impose the terms of the scheme on a dissentient minority within a consenting class (whose interests, therefore, are materially aligned with the rest of the class).
However, when considering whether to exercise its discretion to impose a Part 26A plan on a dissenting class by way of cross-class cram down, the court must apply a different test. The fact that some classes have voted in favour of a plan gives no indication of the commercial merits or fairness of a plan for a dissenting class, whose interests are not aligned with those voting in favour. The court is therefore required to apply its mind to the issue of whether an alternative arrangement would provide for a fairer distribution of the benefits of the restructuring as between different classes.
Should the court give weight to an overall majority in favour of a plan?
Snowden LJ held that the overall value of claims voted in favour of a plan (across all classes), is not a relevant factor in the exercise of the court’s discretion to impose a plan on a dissenting class. Given the dissimilarity in interests between different classes, he considered that the fact that the assenting classes may have voted overwhelmingly in favour has no bearing on whether it is fair to impose the compromise on a dissenting class. The court should not attempt to find similarities between the interests of assenting and dissenting classes, in order to determine whether a dissenting class might have rationally supported the plan.
Although Snowden LJ accepted that it may be permissible for the court, when exercising its discretion, to have some regard for the level of support for a plan within a dissenting class, this must be carefully considered. This court will scrutinise factors such as the motives of those creditors within the class who voted in favour, as well as the completeness of information provided by the plan company. In this case, the 2029 noteholders who had voted in favour could not be regarded as a representative cross-section of the class. Snowden LJ also noted critically that the explanatory statement did not draw attention to the departure from the pari passu principle, and made no mention of the greater risk of non-payment for 2029 noteholders. The fact that a simple majority of the dissenting class had voted in favour of the Plan was not therefore given any weight.
Other points of interest:
The substitution of an English SPV as issuer of notes (to enable the utilisation of Part 26A) was not the subject of the appeal. However, Snowden LJ noted that this device has not previously been discussed at appellate level and “the fact that this judgment does not deal with this issue should not be taken as an endorsement of the technique for future cases”.
Snowden LJ has previously criticised the imposition by scheme proponents of an (unnecessarily) abbreviated timeframe which puts a metaphorical “gun to the head” of the court to sanction a proposed scheme (Re Noble Group Limited  EWHC 2911 (Ch)). In relation to Part 26A applications, Snowden LJ noted that these issues were accentuated by the complex valuation disputes arising. He emphasised that a plan company must make valuation information available in a timely manner. Parties and experts must cooperate and narrow the issues for decision and 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”.
David Steinberg comments:
"This Court of Appeal judgment is a very important milestone in the evolution of Part 26A restructuring plans. Snowden LJ is probably the most influential and highly regarded member of the current judiciary, as far as the law of restructuring and insolvency is concerned. That factor, taken together with the fact that this is the first time the Court of Appeal has opined upon the cross-class cram-down features of the Part 26A restructuring plan, inevitably means that this decision will cast a very long shadow over future Part 26A plan proposals. In this – and previous – judgments, Snowden LJ has shown a healthy scepticism about plan proponents’ self-serving protestations of urgency, as well as of their Cassandra-like doom-laden projections of the economic outcomes for creditors of ‘the relevant alternative’. Plan proponents have received yet another reminder of the need to support their plans with robust, realistic and ‘litigation-proof’ financial projections and valuations, as well as to demonstrate to the court that they have consulted with affected stakeholders in an appropriate and timely manner."