The Plan, proposed by the Plan Company in January 2023, was designed to provide the Adler Group with an injection of new money and a runway to wind down its business operations and sell its assets by the end of 2026 in order to repay its debts in full (including the various series of senior unsecured notes it had issued). For further background, Hogan Lovells’ summaries of the sanction hearing and the sanction judgment for the Plan can be accessed here and here respectively.
Fairness and Dissenting Creditor Classes
Previous plan authorities opened the door to the view that the Court can (in some circumstances) have regard to levels of support across all plan creditor classes generally in considering the fairness of a restructuring plan for dissenting creditor classes. Indeed, in his first instance judgment, Justice Leech had placed some weight on the significant levels of support for the Plan amongst noteholders, including 62% in value (of those voting) of 2029 noteholders (short of the 75% statutory threshold for class consent).
The Court of Appeal has firmly rejected that approach. In doing so, Lord Justice Snowden made clear that the Court, when considering whether to exercise its discretion to sanction a plan:
- can apply principles developed in relation to schemes of arrangement, including a rationality test, in relation to an assenting class;
- cannot apply the same test in relation to a dissenting class. While the Court can pay some regard to the fact that a majority (albeit not 75%) of a dissenting class voted in favour of a plan, it cannot simply defer to that fact; rather the Court needs to examine the motivations of creditors within the class and the underlying commercial issues;
- should approach satisfaction of Condition A (the “no worse off" test) as a jurisdictional requirement for cross-class cram down only. Satisfaction of Condition A gives rise to no presumption in favour of sanction;
- the horizontal and vertical concepts, developed in CVA cases, can usefully be applied when looking at whether to impose a plan on a dissenting class. The vertical comparison involves a comparison of the position of a class of creditors under the plan with the position of that same class in the "relevant alternative". The horizontal comparison compares the position of the class in question with the position of other classes under the plan. These comparisons can assist the Court in determining whether the differing outcomes for the class in question can be justified and therefore whether the plan represents a fair outcome for a dissenting creditor class; and
- should not place any weight at all upon levels of support across creditors generally when determining the fairness of a plan to a dissenting class, given assenting and dissenting classes will often have opposing interests (which indeed is typically the reason they are placed in different classes). The fact an assenting class has voted in favour of a proposal “…says nothing about the commercial merits of the plan for a dissenting class or the fairness of imposing the plan upon them”.
Significantly, the Court affirmed that in determining whether a restructuring plan treats different classes of creditors fairly, the Court should take into account whether the plan company could have proposed a better or fairer plan. It cannot simply be argued that a plan is “fair enough”. Therefore, in formulating a plan, critical thought needs to be given to the fairness of the treatment of each class of creditors and whether differences in the treatment of certain creditors compared to others can be properly justified.
Pari Passu Principle
The starting point is that a court would normally approve a “wind down” restructuring plan which adhered to the pari passu principle where the relevant alternative is a formal insolvency. At first instance, Mr Justice Leech had found that the Plan did not depart from the pari passu principle.
A key feature of the Plan is that it preserves the staggered maturity dates of the various series of notes issued by the Plan Company, other than notes maturing in 2024 whose holders had granted a one year maturity extension to provide breathing room for the Plan Company and, in return, were granted security and priority ahead of the other later-dated series of notes. The Plan provides for a gradual sell-down of the Adler Group’s real estate assets in order to discharge its debts and is therefore a “liquidation plan”. The relevant alternative to the Plan is formal insolvency. The AHG contended that, as such, the Plan should have harmonised the maturity dates of the various series of notes to reflect the pari passu treatment that all noteholders would be given in a formal insolvency.
The Court of Appeal held that the Mr Justice Leech had been wrong to find that the Plan did not depart from the pari passu principle. By failing to harmonise the maturity dates of the notes, the Plan had unjustifiably departed from the pari passu principle that would have applied in the relevant alternative. Broadly, the basis of this finding was that the uncertainty attached to the value at which the Adler Group could sell its real estate assets meant that the holders of the 2029 notes (being the latest-dated notes) bore a greater risk of suffering a shortfall than holders of the earlier-dated notes, who had temporal priority and would therefore be paid out first. Relevant factors in the Court’s analysis included that there was only a small amount of headroom in the Plan Company’s estimations that it would realise sufficient value from its assets to pay noteholders in full, and that the valuation evidence of the Plan Company was forward-looking and relied on a recovery in the currently troubled German real estate market and was therefore inherently uncertain.
Further, the Plan Company’s Explanatory Statement (issued to creditors ahead of the meetings to vote on the Plan) was criticised for failing to draw creditors’ attention to the preservation of the notes’ sequential maturity dates and the greater risk of shortfall for the 2029 notes – emphasising the importance of Explanatory Statements providing creditors with clear, frank and complete information to enable them to understand the proposed plan and exercise their judgment as to whether the plan is in their interests.
The Court acknowledged that there may be circumstances in which a departure from the pari passu principle under a plan (for which the relevant alternative is a formal insolvency) would be justifiable. Specifically, in this case the 2024 noteholders had been granted security (and so were given priority over other noteholders) in return for a one year extension to the maturity of the 2024 notes to afford the Adler Group some breathing room to implement the liquidation plan. At first instance, Mr Justice Leech had not considered whether this priority was a proportionate response to a one year extension; however, the Court's view was that this departure from the pari passu rule was justified and not unfair to the 2029 Noteholders.
More generally, the Court declined to set out an exhaustive list of the circumstances in which it might be justified to depart from the pari passu principle. However, it noted that such a departure was likely to be justifiable where creditors provided some additional benefit or accommodation which supported the plan company, such as new money (where it was appropriate for the new money provider to be given priority) or where trade creditors or suppliers needed to be paid in full to ensure the continuation of the plan company’s business.
Another example given was the elevation of the existing claims of new money providers, such that their existing claims also rank above existing creditors. The Court noted that such cases were likely to be highly fact-specific. While cases using this mechanic had not yet been the subject of adverse argument, there might be situations where such elevation was not justified, such as where the new money was “…not in reality available on an equal and non-coercive basis to all creditors” or if the extent of the elevation was disproportionate to the additional benefits provided.
Treatment of Out-of-the-Money Creditors and Shareholders
The AHG ran an argument both at first instance and on appeal that, because the Plan Company was insolvent in the relevant alternative and its shareholders were not contributing to the Plan, the entirety of the equity in the Plan Company should have been redistributed from the shareholders to the noteholders for no consideration.
Having confirmed that retention of equity by the shareholders did not breach the pari passu principle, the Court set out its provisional view that the Court does not have power under Part 26A of the Companies Act to sanction a compulsory cancellation or transfer of shares in a plan company, or a complete compromise of out-of-the-money creditors, for no consideration. This is because a restructuring plan requires a “compromise or arrangement” which involves an element of give-and-take.
Moving forward, plan companies will need to be mindful that where a restructuring plan seeks to compromise out-of-the-money creditors and/or shareholders, an amount still needs to be paid to those creditors or shareholders under the terms of the plan to compensate them for the extinguishing of their interests – although this will have to be a judgment call for each plan company, given the Court did not consider what level of consideration might be appropriate to establish the necessary “give and take”.
Conduct of Plan Proceedings
Lord Justice Snowden expressly acknowledged the pressure which Mr Justice Leech had been placed under at first instance due to the volume of evidence prepared by the parties and the compressed and “inadequate” timetable for the sanction hearing and subsequent delivery of his decision. Snowden LJ made clear that while there will be situations in which time pressure is outside of the control of the parties (citing Virgin Active and its covid-related issues as an example) “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”. He was also critical of the growing trend to ask for matters usually be decided at the convening hearing to be left for consideration at sanction. This follows on from similar comments made by Mr Justice Miles in November 2023 in his convening judgment for the Aggregate restructuring plan ( EWHC 2849).
In the future, proponents of restructuring plans will need to ensure they act expeditiously and commence plan proceedings with ample time before foreseeable debt maturities or other hard deadlines, so that the proceedings can be properly conducted, parties are given a fair opportunity to prepare their evidence and the Court has a reasonable time to assess that evidence and formulate its judgment. The Court is likely to take a dim view of any future restructuring plans brought on an urgent basis where the plan company (or any other proponent) is not able to clearly justify why it was not able to initiate the plan at an earlier stage.
Each series of the Adler Group's notes is governed by German law. The Plan Company had been incorporated in England and substituted as the issuer of the notes for the specific purpose of enlivening the jurisdiction of the English Courts in relation to the Plan, which is an approach which has been adopted a number of times in previous cases.
This substitution was not raised by the AHG as a point for consideration by the Court. Notwithstanding this, the Court observed that the fact the decision did not deal with whether the issuer substitution was a valid technique for accessing the restructuring plan process should not be taken as an endorsement of the process in other cases.
Conclusion and Next Steps
Although this judgment provides helpful guidance on a number of issues, the Court has left open areas for further debate. Notwithstanding that the Plan was a “wind down plan” where the relevant alternative was a formal insolvency, a number of the conclusions will have wider implications on how companies structure a variety of different types of plan and in particular those proposing differential treatment for pari creditors.
The judgment does not deal at all with the practical consequences of the setting aside of the sanction order for the Plan, which in some senses is not surprising. The restructuring community will be watching with interest to see what steps are now taken by either the Plan Company or noteholders following this decision.
Authored by Patrick Dunn, Margaret Kemp and Naomi Parmar.