In what is the third, sanctioned restructuring plan since the introduction of Part 26A Companies Act 2006 in June 2020, the previously untested “cross-class cram-down” mechanism has now been applied for the first time. Cross-class cram-down being the ability to impose a restructuring plan on dissenting stakeholders whether or not those dissenting creditors form part of the same class as the approving creditors.
Three companies within the Deep Ocean group, a cable laying and trenching business, each proposed restructuring plans to achieve a solvent wind-down. However, the third in the trio was not approved by the requisite majority of creditors (75% in value) in each class. The secured lenders, in one class, voted unanimously in favour and had already entered into a lock-up and voting agreement in advance of the convening hearing. In the second class, although close to the requisite majority (a deciding factor for Mr. Justice Trower), only 65% by value of the creditors voted in favour of the plan. This class being made up of all other unsecured creditors excluding certain claims such as employee, tax and intercompany liabilities (the “Dissenting Class”).
Mr. Justice Trower was satisfied that the restructuring plan was fair, just and equitable and so, for the first time, went on to consider whether the two conditions for cross-class cram-down had been met. If satisfied, Mr. Justice Trower noted that this would provide the company with a “fair wind behind it” before making the discretionary decision of whether to sanction the plan or not. The two conditions to be satisfied are:
A. whether any of the members of the Dissenting Class would be any worse off than they would be in the “relevant alternative”; and
B. whether the restructuring plan had been approved by at least one class of creditors who would have a genuine economic interest in the company in that “relevant alternative.”
On the evidence before it, the court agreed that the relevant alternative in this scenario was the sub-group of companies entering administration or liquidation (the wider group having determined that they can no longer fund the sub-group). The restructuring plan was structured so that the Dissenting Class would receive a return of 4% above the outcome of any administration or liquidation. In respect of condition B, the approving secured lender class would have made a recovery from the assets charged in their favour in the event of the company entering administration or liquidation, this being the genuine economic interest in the “relevant alternative.”
Mr. Justice Trower also considered the following discretionary factors before making his decision to sanction the restructuring plan:
- whether there were any unjustified differences in the treatment of creditors, “horizontal comparability”;
- whether the plan creditors were fairly represented at the respective plan meetings;
- whether there was anything in the formulation of the restructuring plan which caused concern as to how it would operate in practice; and
- whether the restructuring plan was likely to be substantially effective in relevant jurisdictions outside England and Wales.
The benefits to be received by the Dissenting Creditors under the terms of the restructuring plan were to be provided by Deep Ocean group entities other than the plan entities. This factor combined with the fact that the Dissenting Creditors were out of the money in the relevant alternative was, in Mr. Justice Trower’s view, a powerful pointer towards sanctioning. All of the above supported the conclusion that this was open to an intelligent and honest man to vote in favour of the restructuring plan.
Notably, Deep Ocean was not contested and so the valuation evidence and “relevant alternative” concept was not in dispute. We anticipate seeing many more restructuring plans in 2021 with likely challenges to these two critical decision making factors.