European Restructuring And Distressed: 2022 In Review

• Jurisdiction: European Union
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Author: Mr Bevis Metcalfe, Matthew Smith, Melis Acuner, Adam Blakemore, Catherine Richardson, Simon Walsh and William Sugden
• Published date: 05 January 2023

Market overview

Few could have predicted the unexpected twists and turns 2022 would provide. A year in which the spectre of war came home to haunt Europe. It sent energy prices spiralling out of control and the world economy facing a triple whammy of rising interest rates, double-digit inflation and a reversal of the forces of globalisation that had been the predominant trend in the world economy since the end of the Cold War. And, of course, 2022 was also the year we lost Meatloaf...

The European restructuring landscape continued to evolve in 2022, with the UK retaining its position at the top of the forum shopping league tables, but against a backdrop of more serious competition from some of its continental European neighbours as the implementation of the EU Restructuring Framework Directive introduced novel ideas of shareholder cramdown to a number of new jurisdictions. While we have yet to see a wave of companies heading to a new jurisdiction to implement their restructuring, we have certainly moved into a new era in which the UK won't be the only destination.

The market for corporate debt looks set to continue to cleave into two camps: quality assets that have access to financing albeit at a reset price on the one hand, and corporates that are unable to access funding - at least in public markets - on the other. As with primary issuance in 2022, we expect to see more private capital finding its way into stressed and distressed corporates in 2023 as companies seek to buttress balance sheets battered by inflation and rising floating rates.

Commercial real estate will continue to feel the pressure in 2023 as a combination of rising rates and demand compression put downward pressure on yields and prices. All eyes will be on Adler, the German real estate behemoth, which announced a deal with creditors late in 2022 but which needs to fold a number of series of bonds forming part of its jumbo capital structure into the deal and (at least publicly) was facing the prospect of challenges from rival groups of bondholders.

Scheme and restructuring plan round-up

Starting the year in style was the Smile Telecoms¹ restructuring plan. In Smile, the company successfully applied under section 901C of the Companies Act 2006 to exclude a creditor class from voting that was proven to be out of the money (i.e., it did not have a 'genuine economic interest' in the outcome of the restructuring plan). This was the first time this route to cross-class cram down had been utilised. The Court was satisfied (based on evidence which included valuations, comparator reports, and admissions from creditors that they were out-of-the-money) to grant the company's application and order a meeting convened by only a single class of the in-the-money creditors. The Court set out the following principles for such applications (affirming the comments made in the Virgin Active restructuring plan).²

• When considering whether a creditor has a 'genuine economic interest', the Court will assess the position by reference to the relevant alternative insolvency procedure which is likely to be implemented if the plan is not sanctioned.
• The civil standard of balance of probabilities should be applied when determining whether a class actually has an economic interest in a real (as opposed to a theoretical or merely fanciful) sense.
• It is open for the Court to conclude at the convening hearing that there is insufficient evidence to determine that a class should be excluded from voting on the basis that it does not have a genuine economic interest.

At the sanction hearing, the Court addressed objections from a creditor who opposed the Court's decision (made at the convening hearing) to exclude the out of the money class, and convene a single class meeting. The creditor filed evidence challenging the decision, but did not attend the sanction hearing. At the sanction hearing, Snowden J refused to re-open the issue, and gave a warning that creditors who wanted to oppose a plan (or a scheme) must stop "shouting from the spectators' seats and step up to the plate". They must adduce evidence, attend the hearing and make compelling submissions.

In another first, Smile was a foreign company seeking to compromise its shareholders' interests in the equity of the company. The Court was careful to hear detailed evidence of the effectiveness of the plan in Mauritius (where the company is incorporated) on the company's shareholders. Ultimately it was satisfied with the local law expert evidence that the necessary amendments to the constitution and share capital would be validly effected pursuant to the power of attorney given to the scheme company, and that the Court was not exercising exorbitant jurisdiction.

The second attempt of the Amigo³ scheme of arrangement was sanctioned in 2022 (the first having been attempted in 2021 in which the subprime guarantor lender proposed a scheme which was resisted by the Financial Conduct Authority ("FCA") on fairness grounds and...