The forecast for the English scheme and plan looks set fair despite concerns around Brexit turbulence.
The restructuring market’s appetite for Part 26 schemes of arrangement and Part 26A restructuring plans shows no signs of diminishing, with some debtors (Smile Telecoms and ED&F Man) even taking a second bite of the cherry. In this article, we explore recurring themes identified in the market throughout the past 18 months.
Out of the money, out of the room
The late Robin Dicker QC, acting for the landlords in Virgin Active, colourfully commented, “if you are not sitting at the table, that is because you are lunch”. 2022 started with the convening hearing for the second restructuring plan of Smile Telecoms, a Mauritius-incorporated holding company of a pan-African telecoms group. Although the group had identified eight classes of creditors and members relating to the plan, Smile asked the Court to convene a meeting of only one class of creditors — the super senior class — relying for the first time on the new section 901C(4) of the Companies Act 2006, which allows the exclusion of a class of creditors and/or members from voting on a plan if none of the members of those classes have “a genuine economic interest in the company”. Smile argued that in the event of insolvency, value clearly broke in the super-senior creditors and therefore it would be inefficient to incur time and cost convening meetings of the other out-of-the-money classes, including the senior lenders, the preference shareholder, and ordinary shareholder.
Smile’s application was supported by valuation evidence (prepared by a party whose appointment had been accepted by the senior lenders) that had been shared with and scrutinised by the senior lenders. In addition, the estimated outcome statement had shown that the senior lenders were clearly out of the money. Although a significant discount was applied in the latter, the Court was satisfied that it was within the normal range for distressed sale processes. Smile’s first restructuring plan in 2021 had been predicated on a sales process of its non-core assets, and the resulting offers from that M&A process assisted the company in demonstrating to the Court that the value broke well within the super-senior debt.
All of these factors led the Court to allow Smile’s application to exclude all but the super-senior lenders from voting on the plan. The front-loaded nature of an application under section 901C(4) application assists a debtor in identifying (and addressing) challenges to valuations early on instead of entering into uncertain valuation battles at the sanction stage, at which point the Court will decide whether to exercise its discretion to cram down. Although one dissenting senior lender sought to revisit the Court’s conclusions at the sanction hearing, the Court had little patience for such tactics where insufficient contrary valuation evidence had been provided to support its case either at the convening or sanction stage. In our view, Smile will prove the exception rather than the rule because so few cases provide such unambiguous valuation outcomes. But it remains tactically an astute ploy for those debtors that have sufficient time to equip themselves with strong valuation evidence. Chancery judges have said that they do not want restructuring plan hearings to become battlegrounds for valuation disputes in the Chapter 11 mould. The Smile example may give some succour to this hope, though the experiences in Virgin Active and Hurricane Energy suggest otherwise.
Shareholder restructuring plans: foreign companies welcome
Foreign incorporated companies have long held the ability to propose a scheme of arrangement provided that they have a sufficient connection to the English jurisdiction. The Smile restructuring plan also proposed to compromise the rights of the shareholders of a Mauritius-incorporated company. There were various features of the shareholding that connected the equity to the English jurisdiction (including an English law-governed shareholder agreement), and this, coupled with comfort that the compromise of the shareholders would be recognized and implemented in Mauritius, persuaded the English court after careful examination to sanction the restructuring plan. This case represents an unexpected extension of the portability of the restructuring plan as a single-stop tool for cross-border restructurings, but will of course need to be approached on a jurisdiction-by-jurisdiction basis.
Not a party? No problem
Smile used a deed of contribution to create sufficient nexus between itself (as the plan company) and plan liabilities owed by certain of the group’s operating companies. In the past 18 months, this once-novel technique has fast become a tried and tested means of funneling group liabilities to a single point of entry for the purposes of proposing a scheme or restructuring plan.
The main effect of the deed of contribution is that the plan company unilaterally assumes liability as a primary obligor in respect of the relevant debts, which is particularly useful if the underlying finance documents do not allow the plan company to accede to the debt as a co-issuer. Deeds of contribution were employed in the DTEK Energy and Swissport scheme cases and in the Gategroup and Pizza Express restructuring plans.
Bumps in the road?
The widely predicted post-Brexit turbulence for schemes and plans has not manifested itself in any material way to undermine foreign-incorporated debtors’ appetite to propose or the English court’s preparedness to assert jurisdiction. A more medium-term view needs to take account of the competing new restructuring regimes in EU Member States (see separate article), but there is room for justified optimism that the mature jurisprudence coupled with the new power to cram-down will ensure that the English scheme and plan will remain the preferred restructuring tools of choice for many larger debtors.