Less Scheming: Cross-Class Cram-Downs Are Out in the Open for All to See

Summary

The Corporate Insolvency and Governance Act 2020 introduced a new restructuring plan (the “Restructuring Plan”) under Part 26A of the Companies Act 2006. As a recent entrant into the market, the Restructuring Plan is now making noise – most notably, when its cross-class cram-down feature was used, for the first time, by a UK subsidiary of DeepOcean Group Holding B.V. (together with all of its subsidiaries, the “DeepOcean Group”). The DeepOcean Group’s use of the Restructuring Plan also marks the first time that a Restructuring Plan has been used to facilitate a solvent wind-down, rather than a rescue.

This client alert summarises the latest developments relating to the Restructuring Plan and is relevant to disrupted, stressed, and distressed companies, as well as their directors and creditors.

For a 90 second legal update on the Restructuring Plan, see our earlier infographic.

The Restructuring Plan

The Restructuring Plan, much like a scheme of arrangement, requires court oversight and approval. In particular, there will be two hearings. The first hearing requires the court to examine class composition, jurisdictional issues, and confirm a date on which voting should take place. The second hearing requires the classes to vote on, and the court to decide whether or not to sanction, the Restructuring Plan.

The Restructuring Plan, while similar to the scheme of arrangement, is distinguished by certain qualifying conditions and key features. To qualify for use of the Restructuring Plan, the relevant company must have encountered, or be likely to encounter, financial difficulties that will, or may affect, its ability to carry on business as a going concern. This is not the case for the scheme of arrangement, the Restructuring Plan is solely for companies in or heading for financial distress.

The key distinguishing features include the:

• voting requirements. The proposed plan must be approved by at least 75% in value (of debt or shares) by each class that votes. However, unlike schemes of arrangement, there is no numerosity requirement that 50% of the class members voting also vote in favour of the proposed plan;

• cross-class cram-down mechanism. Dissenting creditors may be crammed-down if:

1. the court is satisfied that, if the compromise or arrangement were to be sanctioned, the dissenting creditors would not be worse off under the “relevant alternative” (which means the alternative most likely to occur if the plan was not sanctioned) (“Condition A”); and

2. the compromise or arrangement has been approved by at least 75% by value of at least one class of creditors, which would have a genuine economic interest in the company, in the relevant alternative (“Condition B); and

• disapplication of shareholder rights. The court can disapply certain shareholder rights, including pre-emption rights and the requirement to seek shareholder authority to allot and issue shares to implement the plan.

The story so far

The Restructuring Plan was used to restructure:

1. Virgin Atlantic Airways Limited in September 2020; and

2. PizzaExpress Financing 2 plc in October 2020.

The court made clear that it would evaluate the Restructuring Plans in the same way it would a scheme of arrangement, including with respect to class composition. Accordingly, a class should be comprised of creditors or members whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest as to whether or not to vote in favour of the Restructuring Plan. While the cross-class cram-down mechanism was not used, it was observed that the availability of a cross-class cram-down provides a company with an incentive to increase the number of voting classes to increase the chances of a favourable vote.

The DeepOcean Group’s restructurings and the first cross-class cram-down

Background

In January 2021, three interconditional Restructuring Plans for three UK subsidiaries of the DeepOcean Group were sanctioned, namely DeepOcean 1 UK Limited (“DO1”), DeepOcean Subsea Cables Limited (“DSC”) and Enshore Subsea Limited (“ES”, and together with DO1 and DSC, the “Plan Companies”).

The Plan Companies and their subsidiaries form the cable laying and trenching business (the “CL&T Group”) of the DeepOcean Group, providing subsea services, principally to those in the oil and gas and offshore renewable sectors. The CL&T Group was underperforming and stood no prospect of becoming profitable under the market conditions and with its contractual obligations. It was continuously funded by the wider members of the DeepOcean Group. The board of DeepOcean Group Holding B.V. concluded that the CL&T Group’s operations were unsustainable and should cease, but should do so on a solvent basis, with additional funding from the wider group, to provide a better result for creditors and minimise disruption to the wider group.

The Restructuring Plans

The Restructuring Plans proposed splitting the creditors into the following classes:

1. secured creditors under a multicurrency facilities agreement, comprised of four facilities, three of which were drawn-down (the “Secured Creditors”);

2. two vessel owners that chartered vessels to DO1, who did not benefit from security and whose claims were subordinated to the secured facilities (the “UK Vessel Owners”);

3. the UK landlord of DO1 (the “UK Landlord”); and

4. any remaining creditors, being holders of any claim against the Plan Companies other than the three aforementioned groups and certain excluded claims (the “Remaining Creditors”).

Each of the three Restructuring Plans contained, at least, a secured creditor class and an unsecured creditor class.

Approval

Creditors voted on their respective Restructuring Plans at virtual meetings held on 6 January 2021 where:

• the plans for DO1 and ES were approved by at least 75% in value of the creditors in each class present and voting in person or by proxy at the relevant plan meeting; and

• the plan for DSC was unanimously approved by one class, which consisted of the Secured Creditors with claims against DSC. However, only 64.6% of the relevant Remaining Creditors class with claims against DSC, voted in favour of the plan.

The DSC plan was not approved by the requisite number of creditors in both classes that voted. The court was asked to exercise its discretion to use the cross-class cram-down mechanism, for the first time, to sanction the DSC plan. Evidence had been submitted that the relevant alternative was an administration or liquidation of the Plan Companies. Counsel for DSC submitted, and the court was satisfied, that Condition A and Condition B had been met, as:

1. the relevant Remaining Creditors would receive at least 4% more than they would in an administration or liquidation of the Plan Companies (in which they would receive nominal or nil returns); and

2. the Secured Creditors with claims against DSC would have received payment in an administration or liquidation, and therefore the plan had been approved by at least one class of creditors with a genuine economic interest in the relative alternative.

Accordingly, the first cross-class cram-down was used and all three Restructuring Plans were sanctioned.

Other ‘firsts’

While this was the first time the cross-class cram-down was used, it was also the first time:

• a Restructuring Plan has been used to facilitate a solvent wind-down, rather than a rescue – the court held that the fact the plans would have a mitigating effect on the severity of the losses the creditors could otherwise sustain was sufficient to satisfy the requisite purpose test, which provides that the plan eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties.
• a bar date was used in a Restructuring Plan – the creditors have three months from the plans becoming effective have to lodge their claims and without lodging such notice, they will not be entitled to receive consideration under the plan but will be bound by the terms of the plan.

Commentary

The first use of the cross-class cram-down mechanism marks an important development in the UK’s restructuring regime. While English law is a popular choice of law for restructuring companies, the use of English law is considered under threat by the end of recognition of its insolvency procedures in EU Member States following Brexit, and by the reforms of the insolvency laws of EU Member States. The Restructuring Plan’s introduction, built on much of the law and procedure familiar from the scheme of arrangement, offers an exciting and flexible new tool. It remains to be seen whether the use of the cross-class cram-down will result in disputes over valuation, as it does so often in chapter 11 proceedings, or whether the decision not to codify the absolute priority rule means it escapes that expensive danger. Further, as more restructurings are effected through use of the Restructuring Plan, we expect debtors’ confidence in the procedure to continue to grow and a greater proportion of debtors to opt for the Restructuring Plan’s flexibility over traditional schemes of arrangement.

Joe Donaghey, London Trainee Solicitor, contributed to the drafting of this alert.