July 10, 2023

The Adler restructuring plan: competing valuation evidence; the pari passu principle; and retention of equity


The Court1 exercised its discretion to sanction a restructuring plan proposed by AGPS BondCo PLC (the Company) (part of the Adler real estate group) to amend indebtedness arising under six series of senior unsecured notes governed by German law, which matured on different dates through to 2029.

Sanction was opposed, with both the Company and the opposing ad hoc group of plan creditors adducing detailed valuation evidence. The Court's careful analysis of this competing evidence will be of interest to those looking to challenge other restructuring plans.

The Court found that it was appropriate to sanction the plan, which provided for the shareholders to retain a significant stake in the Company (and hence any upside) if the plan succeeded, even though they provided no support for the plan and no additional funding. 

It was common ground that the relevant alternative to the plan was a formal insolvency process in which the claims of plan creditors would rank equally for payment.  However, with one exception, the terms of the plan preserved the notes' existing staggered maturity dates.  The Court found that this preservation did not constitute a departure from the pari passu principle as it was satisfied, on the evidence, that if the plan was implemented, it was likely that plan creditors would be paid in full. 

At the time of writing, permission to appeal had been sought from the Court of Appeal.


The group's business consists of the purchase, management and development of income-producing, multi-family residential real estate in Germany. The current domestic and global economic downturns, and decreased business confidence, had caused a sharp downturn in the demand for residential and commercial real estate in Germany. This had a significant adverse impact on the group's business.  The group's financial difficulties had recently become acute and the group did not have sufficient funds to repay certain notes which fell due imminently.

The key terms of the proposed restructuring plan included: extension of the maturity of one set of the senior unsecured notes (to alleviate liquidity pressures), with other maturity dates remaining unchanged; and the introduction of new money.  If the plan was implemented, the group intended to execute an orderly wind down and sale of its assets.  Sanction of the plan was opposed by an ad hoc group of noteholders who asserted that the plan was, in essence, a "liquidation plan", which was not an attempt to rescue the business as a going concern.  If the plan was not implemented, it was common ground that the relevant alternative was formal insolvency proceedings.

The Company (incorporated in England & Wales) had been substituted in place of the original issuer of the notes (a Luxembourg incorporated company) pursuant to the substitution procedure under the notes.  One of the issues before the Court was whether this substitution was valid as a matter of German law.

For the purpose of voting on the plan, the notes were divided into six classes. All classes voted in favour of the plan by the requisite majority, apart from one dissenting class in respect of which a cross-class cram down order was sought.

The Court's decision

Note issuer substitution valid – the Court heard conflicting evidence but accepted the expert evidence on matters of German law adduced by the Company.  It held that the issuer substitution provision in each of the series of notes was valid and enforceable as a matter of German law and that the Court had jurisdiction to sanction the Plan2. 

No departure from the pari passu principle - the Court noted that the pari passu principle was a fundamental part of corporate insolvency law.  However, in this case, preserving the staggered maturity dates of the notes did not constitute a departure from the principle as the Court was satisfied that, if the plan was implemented, it was likely that plan creditors would be paid in full. 

However, this plan was different to other restructuring plans (and company voluntary arrangements) where it is accepted that creditors will not be paid in full.  It is therefore important to note that the Court's comments that, had it been satisfied on the evidence that the most likely outcome of plan implementation was a significant shortfall, it might well have been prepared to accept that there was a departure from the pari passu principle and that this departure was unfair.

Cross class cram down – application of the "no worse off" test3 – it was common ground that the relevant alternative was formal insolvency proceedings.  The Court held that, if the plan was not sanctioned, the dissenting class would recover 63.25% of the principal payable to them under their notes.  The Court then considered competing evidence adduced by the Company and the ad hoc group as to whether, if the plan was sanctioned, any members of the dissenting class be any worse off than they would be in the event of the relevant alternative of formal insolvency proceedings.  The Court preferred the Company's evidence and found, on a balance of probabilities that it was likely the dissenting class will be repaid in full.

Equity retention – whilst this is the point on which the Court had the greatest concern when approving the plan, it held that it was not appropriate to refuse to sanction the plan simply because the existing shareholders retained a 77.5% interest in the group (even though they provided no support for the plan and no additional funding).  This retention of equity was justified and the new money providers (who were those most affected by this retention) had negotiated their 22.5% stake in the equity.  Ultimately, the possibility (or even likelihood) that the shareholders might receive a windfall was not sufficient to justify putting the group into insolvency proceedings at the expense of all of the plan creditors who have voted for the plan.




1 Re AGPS BondCo PLC [2023] EWHC 916 (Ch)

2 Separately, a member of the ad hoc group had also commenced proceedings in the Regional Court of Frankfurt am Main for a declaration that the issuer substitution was invalid and ineffective.

3 s901G Companies Act 2006 empowers the Court, to sanction a plan under s901F notwithstanding that the arrangement has not been approved by the requisite majority in every meeting of creditors provided that conditions A and B are met.  Condition A is that the Court is satisfied that, if the compromise or arrangement were to be sanctioned under s901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (the "no worse off test").  Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under s901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.  In this case, there was no dispute that Condition B was satisfied. 

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