Adler: Court Of Appeal Sets Aside Sanction Of A Restructuring Plan

• Published date: 02 April 2024
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-Structuring, Financial Restructuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Shareholders
• Law Firm: Mayer Brown
• Author: Ms Devi Shah, Nicola Hughes and Alexandra Wood

SUMMARY

In the first appeal of a restructuring plan under Part 26A Companies Act 2006, the English Court of Appeal unanimously set aside the first instance decision sanctioning the plan proposed by AGPS BondCo PLC, part of the Adler real estate group ¹.

The Court of Appeal addressed issues concerning the exercise of the cross-class cram-down power and the process and timetable for the conduct of restructuring plans where the Court is being asked to exercise that power.

The proposed plan sought to amend indebtedness arising under six series of senior unsecured notes governed by German law, which matured on different dates through to 2029. If the plan was implemented, the group intended to execute an orderly wind down and sale of its assets. The relevant alternative to the plan was formal insolvency 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, thereby placing a materially greater risk of non-payment on the 2029 noteholders than it did on the holders of the notes with earlier maturity dates.

In setting aside the sanction order, the Court of Appeal held that, in preserving the existing sequential maturity dates, the plan departed in a material respect from the pari passu principle of distribution that would have applied in the relevant alternative.The plan did not respect the pari passu principle because it involved a greater risk for the 2029 noteholders than for plan creditors holding earlier dated notes. Given the existence of material risks that the group might fail to realise the sums forecast in the report prepared for the company, the payment of the different series of notes sequentially under the plan thus carried the risk that the group would pay the earlier dated notes in full, but would run out of money from realisations before being able to pay the 2029 notes. Findings reached by the Court at first instance on the balance of probabilities (after consideration of competing evidence on future realisations) provided no assurance that sufficient sums would be realised under the plan to pay the noteholders in full. The sequential payments to creditors from a potentially inadequate common fund of money are not the same thing as a rateable distribution of that fund.

There was no good reason or proper basis for the adherence to sequential payments of the notes in accordance with their maturity dates. The Court at first instance had wrongly concluded that it did not need to inquire as to whether the plan would have been fairer or could have been improved and therefore did not appreciate that the parties could easily have produced a fairer plan which eliminated this differential treatment by harmonising the dates.

The enhanced security given to the 2024 Noteholders in exchange for an extra year's extension of their loans was not a departure from the principle of pari passu distribution that was unfair to the 2029 Noteholders.

The Court at...