In a recent judgment, the English court refused to sanction a restructuring plan put forward by oil and gas producer, Hurricane Energy PLC.
Background
Hurricane’s main creditors are unsecured bondholders owed US$230 million. Although Hurricane was likely to trade profitably in the short term, it forecast that it would be unable to repay the bondholders in full at maturity in July 2022 and proposed a restructuring plan. The plan would extend the maturity date for the bonds, reduce the amount due and issue the bondholders with shares providing them with 95% of the equity in Hurricane, with the existing shareholders' interests being reduced from 100% to 5%.
The company proposed a single class meeting of bondholders to vote on the plan, but the court disagreed, ordering that the shareholders should be involved and form a separate voting class because their rights were "affected" by the plan. At the meetings, 100% of bondholders attending voted in favour and 92.34% of shareholders attending voted against the plan.
Hurricane asked the court to exercise its power of cross-class cram down to sanction the plan against the dissenting shareholders. To do this, the court needed to be satisfied that the dissenting shareholders would not be any worse off under the plan than the "relevant alternative" (Condition A), and the consenting class of creditors had a genuine economic interest in the event of the relevant alternative (Condition B).
Decision
It was accepted by all parties that Condition B had been met as the consenting bondholder class would receive a payment in the event of the relevant alternative. The dispute centred on Condition A. The judge found that Condition A had not been met because:
- If the Plan was not sanctioned Hurricane was likely, in the short to medium term, to continue trading profitably. The judge did not accept that the relevant alternative would be its near-term insolvent liquidation.
- There were a number of possible courses of action open to Hurricane over the next year and beyond that would achieve a financial outcome for the shareholders in a year's time better than that offered by the plan.
- By comparison, the plan would not provide any "meaningful return" to shareholders and their interest in the equity would be reduced from 100% to just 5%.
The judge held that, even if Condition A had been met, he would have exercised his discretion to refuse to sanction the plan: the company was currently profitable and if its financial outlook did not improve, it was reasonable to believe that a restructuring could be undertaken at a later stage.
Key takeaways
This case demonstrates that the court is careful when exercising its new cross-class cram down powers. The burden is on those proposing restructuring plans to provide credible evidence of the relevant alternative demonstrating that a dissenting class will not be any worse off should a restructuring plan be implemented – especially in situations where there is no impending insolvency "cliff edge" and scope for argument that the company's financial position might improve.
Find out more
To discuss the issues raised in this article in more detail, please reach out to a member of our Restructuring & Insolvency team.
