On 23 January 2024, the Court of Appeal overturned the High Court's sanction of Adler Group's (Adler) restructuring plan (the Plan) (see our alert). This much anticipated judgment provides clarity on the court's discretion to sanction a plan where there are dissenting classes of creditors.    

Background

The Plan envisaged:

• the subordination of the various series of noteholders to new money creditors as well as to the notes due to mature in 2024 (which were extended to 2025), but otherwise preserved the existing noteholders' maturity dates
• a wind down by the end of 2026 of the group's business and its assets sold to pay all of its debts in full.

An ad hoc group of holders of the 2029 notes (AHG) appealed the sanction of the Plan on grounds that, amongst other things, the Plan violated the pari passu principle.

Key takeaways

Pari passu principle

The Court of Appeal held that by preserving the maturity dates, the Plan, without good reason or justification, did not apply the pari passu principle of distribution which would have applied to the notes in an immediate liquidation (the agreed "relevant alternative" to the Plan) in which all noteholders would rank equally as unsecured creditors, meaning that creditors with later maturity dates bore more risk under the Plan. The security given to the 2024 notes was also in breach of the pari passu principle, but this was justifiable because of the postponement of the maturity date for the 2024 notes. 

Court's discretion to sanction 

When considering whether to exercise the court’s discretion to impose a restructuring plan on a dissenting class by cross-class cram down (CCCD), satisfaction of the statutory conditions:  

• "Condition A" the dissenting class will be "no worse off" than in the relevant alternative (vertical comparison), and 
• "Condition B" that there is an assenting class with a genuine economic interest,

does not create a presumption in favour of CCCD. The court should compare the position of the class in question with the position of other classes of creditors (or members) if the restructuring goes ahead (horizontal comparison). Any differences in treatment of the different classes must be justified on a proper basis. 

Is a better plan available?

The parties could have produced a fairer plan that eliminated the different treatment of the different series of notes by agreeing to harmonise the dates. The Judge had wrongly concluded that he did not need to inquire as to whether the Plan could have been fairer or could have been improved. Where CCCD is being proposed, the court is required to consider whether a different allocation of value would have been possible and if an alternative arrangement would have been fairer. 

Treatment of shareholders

Retention of equity by existing shareholders was not unfair and the principle of pari passu distribution of assets in an insolvency does not require the shareholders of a company to forfeit their shares. Under the relevant alternative of liquidation, there would be no distribution to shareholders until all creditors have been paid which was reflected under the Plan. 

Fairness and overall support for the plan 

The Court of Appeal said that reliance upon the overall level of voting across all classes of creditors should not be considered in deciding whether it is fair or appropriate to cram down a dissenting class. Given that creditors are categorised into classes because they have insufficient commonality of interests to consider the merits of a plan together, by definition the views of the assenting class(es) cannot influence whether a plan is fair to or in the commercial interests of the dissenting class(es).

Consequently, the approach to fairness applied in relation to schemes and/or assenting classes which simply requires an assessment of rationality and the court considering the question of whether it is a scheme that "an intelligent and honest man…. might reasonably approve" does not apply in a CCCD context. Rather the court needs to consider the underlying commercial factors. 

Conduct of proceedings

The Court of Appeal commented on a number of procedural points:

• Timing: initiating restructuring plan proceedings as soon as is reasonably practicable to allow sufficient time. The English courts will decide cases quickly to assist companies in urgent financial difficulties but this should not be abused. A restructuring involving foreseeable events such as the expiry of maturity dates must allow sufficient time for the proper conduct of contested proceedings or face being adjourned.
• Provision of information: providing clear information to creditors with regard to differential treatment and risks involved is critical.  Adler's Explanatory Statement did not explain the impact that preserving the maturity dates would have on different creditors such that the court could place limited weight on the support by any of the 2029 noteholders. 

What happens next? 

Adler announced that it considers the "…amendments to the terms and conditions of its bonds remain in full force in accordance with German law". Members of the AHG have brought proceedings in Germany seeking declaratory relief that the issuer substitution carried out to enable the English court to exercise jurisdiction in respect of the Plan was invalid. These proceedings were stayed pending the outcome of the English appeal but may now be pursued.

In the meantime, the implications of the judgment will be felt on future restructuring plans looking to implement CCCD, not least given the revised framework for assessing fairness which differs to that used for schemes or within assenting creditor classes.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team