A series of firsts for UK Restructuring Plans

The UK Restructuring Plan process is gathering momentum. Yesterday saw the court sanction the third ever Restructuring Plan on Deep Ocean involving: the very first cross-class cram, first solvent wind-down and first bar date plan. This decision will provide greater clarity for companies and practitioners seeking to implement Restructuring Plans under Part 26A of the Companies Act 2006.

Speed Read

The Restructuring Plan or Super Scheme is a powerful new tool available in the UK to distressed businesses and has only been used through to court sanction in two cases to date (Virgin Atlantic and Pizza Express). However, neither of those precedents tested one of the novel new benefits of the process: allowing a class of creditors who vote in favour of the plan to cram-down another class of creditors that vote against. This is what has now happened in Deep Ocean.

DLA Piper (led by restructuring partners David Manson, Robert Russell, and senior associate Philip Povey) have acted as independent counsel to, among others, the board of directors of three UK Deep Ocean subsidiaries ‘UK Group’ in connection with the first application of the cross-class cram-down provisions in a Restructuring Plan (which became UK law in 2020). Partners Frode Finnoy and Egil Hatling in Norway and Marc Molhuysen in the Netherlands also provided significant support on this cross-border transaction.

This decision is all the more ground-breaking as the senior consenting class was fully locked-up – removing some of the doubt as to whether cross-class cram down is available in circumstances where the assenting class consists solely of locked-up creditors (which arose following the obiter comments made by the judge in Virgin Atlantic, for which see our comments in previous articles regarding lock up arrangements .

Brief Background to the Decision

Deep Ocean is a leading global subsea services provider based in Norway and owned by Triton. The UK Group found itself in financial difficulty and, after assessing its options, decided to propose three interconditional (subject to certain exceptions) Super Schemes. Each Super Scheme contained (at least) a secured creditor and an unsecured creditor class.

The key aspects of the proposed plans sanctioned by Trower J are that:

• secured creditors agree to release their claims against the UK Group (but retain their claims and rights against the wider business);
• unsecured creditors receive a payment in return for extinguishment of their claims that is better (circa 5.2%) than their claim in the relevant alternative (being an insolvency process in which estimated recoveries stand at circa 1.2%);
• part of the Super Scheme included a bar date concept to ensure finality of the compromised claims as part of the broader restructuring of Deep Ocean;
• payments under the Super Schemes are being funded by solvent members of the wider Deep Ocean business;
• certain claims were excluded (e.g. employees, tax and intercompany claims);
• specific assets of the UK Companies would be retained by the wider business;
• the shareholder agreed to inject new equity into the wider business; and
• the UK Group will subsequently be wound-down on a solvent and fully funded basis.

Cross-Class Cramdown and Lock-Up

A key issue in the case was that the secured creditor class (which was made up of a small syndicate of banks) had entered into a lock-up and voting agreement to grant the UK Group breathing space and support pending an assessment of restructuring options by the boards of the UK Group. Importantly, no lock-up or other fees were expressed to be payable to the secured creditors.

At the time of proposing the Super Schemes, this presented an inherent legal uncertainty as there had been commentary from Snowden J in the Virgin Atlantic judgment following the sanction hearing querying whether a fully locked-up creditor class could cram-down non-locked-up creditor classes that vote against a Super Scheme.

In that earlier case, the Court was not minded to rule on the issue as, ultimately, the debtor proposing the Super Scheme was not seeking the additional benefit of the cross-class cramdown provisions. However, this left significant uncertainty for companies waiting to consider the viability of a Super Scheme for their business restructuring and for practitioners alike.

Fortunately, this issue has now been substantively addressed through the Deep Ocean restructuring which required Trower J to consider the position fully. In the case of Deep Ocean, at the creditors’ meetings, two out of three Super Schemes were voted through by all creditor classes. However, the third Super Scheme ‘DSC Scheme’, whilst being approved by the secured / locked-up class, failed to achieve the requisite level of support (i.e. 75% by value) of the unsecured class.

Accordingly, it fell to be considered whether the cross-class cramdown provisions were available. In addition to the usual requirement to demonstrate that a Super Scheme is fair, just and equitable, two new (and untested) provisions needed to be satisfied:

• that none of the members of the dissenting class would be any worse off than they would be in the event of the “relevant alternative” (i.e. in this case, an insolvency process); and
• the plan has been approved by at least one class of creditors or members who would have a genuine economic interest in the company in the relevant alternative, together being the ‘Cramdown Conditions’.

Key Aspects of the Decision

Trower J presided over both the convening and sanction hearing and agreed to sanction all three Super Schemes. A reasoned judgment will follow in the coming days / weeks but, in the DSC Scheme, the judge appeared comfortable with the submissions put forward that the cross-class cramdown provisions could be engaged on the basis that:

• there is a distinction between a situation where:

(i) it is known prior to the launch of the plan that a class of creditors will agree to the restructuring of their own rights without reference to the position of other creditors and they have been included in the plan simply to enable cross-class cram-down; and

(ii) a situation where a class of creditors who properly form part of the restructuring agree to vote in favour (as in this case, where the lenders were key whose consent and agreement to give up their claims against was fundamental to the facilitation and financing of the DSC Scheme and to the wider restructuring of Deep Ocean).

• ‘artificiality’ is key – stakeholders should ask themselves whether the assenting class is a genuine (‘genuine’ was interpreted to mean ‘real’) part of the restructuring or is simply being included for the purposes of engaging the cramdown provisions;
• a substantial majority of the unsecured creditors in the DSC Scheme still voted in favour of the Super Scheme – circa 65% – and a challenge was not raised or reasons given to the judge as to why they voted against the DSC Scheme; and
• the alternative to not sanctioning the DSC Scheme would be to deprive the unsecured creditors of a better outcome than would be the case in the relevant alternative, which the judge accepted to be some form of insolvency process – crucially, the Court accepted a central piece of valuation evidence, which was the entity priority model prepared by Alvarez & Marsal.

Trower J also made a number of helpful practical recommendations with respect to the provision of evidence showing the make-up and identity of a dissenting class constituency that would be considered helpful to the court in such cases.

We await to see the judgment to see the detailed reasoning, as Trower J noted that his judgment would be setting a significant precedent for the future of Super Schemes.

Our View

Although further evolution of the case law is needed, this decision is a major step forward for stakeholders and companies considering a restructuring of their obligations via a Super Scheme. It makes clear that the Court will give effect to the new and beneficial features of the cross-class cramdown provisions where it is required, having regard to the Cram Down conditions outlined above.

The decision should also give greater comfort to ad hoc noteholder committee led restructurings (and their advisers), which typically involve noteholders entering into sophisticated lock-up arrangements in order to ‘bake-in’ support for a traditional scheme of arrangement or Super Scheme.

However, it should be noted that Deep Ocean was also a relatively attractive test case – and further testing of these provisions is clearly needed, particularly in the context of a disputed Restructuring Plan where valuation issues and the appropriate comparison is in hot dispute.

Key design features of the Deep Ocean Restructuring included: (i) no lock-up fees (and therefore the judgment may still require each form of lock-up agreement to be assessed on its own merits); (ii) the exclusion of ‘difficult’ creditor classes (e.g. employees / the tax authority) and intercompany claims; (iii) interconditionality between the three Super Schemes (note that the two other Super Schemes, which formed part of the same overall restructuring package, were voted through by all classes); and (iv) the judge, in the final event, was not being asked to cram-down multiple different classes (just one unsecured class that had voted 65% in favour).

Accordingly, our advice is that stakeholders should continue to think carefully about the use of lock-up arrangements in Super Schemes and what alternatives might be available to locking up.

What’s Next?

Whilst there clearly will be a need for more precedents regarding the new cramdown provisions in circumstances where there is a contest between creditors, the Super Scheme is here to stay and in our view will be a great additional tool for companies and practitioners with wide applicability as a genuine restructuring solution and one not just aimed at complex restructurings with large and differentiated capital structures.

The DLA special situations team will be there to help guide you with this, and we will going into more detail in separate briefing materials regarding:

• the effect of Brexit on recognition issues of traditional schemes / Super Schemes in Europe is likely to be neutral – but precedents are clearly needed for inbound recognition of the new European processes which will fall to be considered under private international law (and, as ever, the Gibbs rule prohibiting the compromise of an English law debt remains very much intact);
• the increasing accessibility of Super Schemes which can be a genuine alternative over other existing and established mechanisms for companies and creditors to agree restructuring and business sale outcomes, including CVAs / schemes / security enforcements and pre-pack administrations; and
• the significant changes coming online across Europe (Germany / the Netherlands / and Norway to name just a few) – the output of which will be significantly enhanced restructuring tools which will need to be appraised / reappraised but are all ultimately good news for companies and stakeholders keen to manage forum issues to their maximum effect.

More to comes from us on the above.

Further Reading:

It’s true that “the Early Bird Catches the Worm”…But Be Cautious on Locking-Up: Snowden refuses to sanction the recent scheme application of Sunbird.

The New UK Restructuring Plan - The “Super Scheme”

Draft bill of the Stabilization and Restructuring Framework