The Adler Restructuring Plan Judgment: Is Pari Passu Passé?

• Published date: 05 May 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Cadwalader, Wickersham & Taft LLP

What Happened

On 21 April 2023, Mr Justice Leech gave his written reasons for sanctioning the Adler Group's novel and ground-breaking English restructuring plan¹ following a fully contested hearing and cross-examination of witnesses. It is the most significant decision involving a restructuring plan since Virgin Active² and was opposed by an ad hoc group of holders of 2029 Notes (the "AHG"). In a lengthy judgment, the Court provided vital insight into its approach to use of its cross-class cram-down power and the circumstances in which a plan can afford differential treatment to otherwise pari passu creditors.

Key Takeaways

The key takeaways from the judgment are:

1. The plan did not violate the pari passu principle despite providing for differential treatment to otherwise pari passu creditors. One of the AHG's arguments was that the plan - which they termed a "liquidation plan" - infringed the pari passu principle because it maintained the time subordination of the 2029 Notes and further subordinated it with new money. Crucially however, Leech J found that it was likely creditors would be paid in full under the plan (based on the evidence presented to the Court) and differential treatment in such circumstances was therefore justifiable.
2. Although the holders of the 2029 Notes were subject to additional credit risk under the sanctioned plan relative to other creditors, this was not unfair for the following reasons
   1. the 2029 Noteholders had, when they acquired the 2029 Notes already accepted that their instruments would be time subordinated;
   2. if the plan is not successful (ie. because the AHG's valuation was correct) Noteholders (including the holders in the AHG) will be able to accelerate their Notes and the governing intercreditor agreement would provide for pari passu recovery;
   3. based on the evidence presented, the Group would need to realise c. '500m less than what was forecast before a creditor would be worse off under the plan than if the plan was not implemented; and
   4. even though the AHG (made up of a group of 2029 Noteholders) contested the plan a majority of the holders of the 2029 Notes did in fact support the plan (including those without cross-holdings in the 2024 Notes).
3. Due to the opposition from the AHG, the plan sought to use the cross-class cram-down mechanic to bind in the 2029 Noteholders When presented with conflicting valuation evidence, the Court made it clear that the onus remains on the plan company to demonstrate that the "no worse off" test is satisfied on the balance of probabilities. This is consistent with the approach taken in the Virgin Active restructuring plan.³ Ultimately the Court preferred the valuation evidence submitted by the Group and approved the use of cross-class cram-down. The Court did note though a number of times that the valuation and financial analysis undertaken by the relevant experts was inherently uncertain.
4. The Group's use of the Issuer Substitution Strategy to engage the jurisdiction of the UK Restructuring plan was valid.
5. Although the plan was sanctioned, Leech J expressed the greatest concern in relation to shareholders retaining 77.5% of the equity in the Group without having to advance any additional funds. Ultimately he concluded that the retention of equity was justified, including because those most affected by it - the new money providers - had negotiated their 22.5% participation and had acted in a commercially rational way.

The appeal process is ongoing.

Background

Adler Group S.A. is the main holding company of a German real estate conglomerate. It is focused on providing affordable residential housing. Its portfolio is estimated to be worth around '8bn. In recent years it encountered a number of destabilising events. These have been well publicised and include:

• ratings downgrades;

• regulatory investigations;

• accusations of related party transactions;

• adverse short-seller reports; and

• bondholder activism.

The Adler Group had significant financial debts with maturities in 2024, 2025, January 2026, November 2026, 2027 and 2029, with each series of bonds governed by German law. A subsidiary in the Group, Adler Real Estate AG, has a note maturity date on 27 April 2023 (the "2023 RE Notes"). This maturity wall was the principal reason cited by the Group for the urgency of the restructuring plan and truncated court timetable.

This confluence of factors led to the Group pursuing a comprehensive financial restructuring. After it failed to obtain the required creditor support to implement the restructuring contractually out of court, it opted to launch a restructuring plan under Part 26A of the Companies Act 2006 despite there being no obvious nexus with England and in preference to other European restructuring procedures, such as the newly enacted German StaRUG or the Dutch Wet Homologatie Onderhands Akkoord.

The Group engaged the jurisdiction of the UK Restructuring Plan through the...