What is the general discretion of the court regarding the sanctioning of English restructuring plans?
Published on 26th Sep 2023
Even if the statutory conditions for cramming down the votes of dissenting creditors has been met, the court retains a discretion to consider other factors
Certain statutory conditions need to be met in order for the court to sanction a plan at least one class of creditors or members has not voted in favour of the plan by the requisite majority (being 75% in value of those present and voting) – referred to as the "cross-class cram down".
As well as considering the "relevant alternative" and the "no worse off" test, there are other factors affecting the court's general discretion in sanctioning (or not) a restructuring plan; satisfaction of Conditions A and B contained in section 901G of the Companies Act 2006 (CA 2006) alone are not enough.
Genuine economic interest
Condition B of the cross-class cram down requires that the restructuring plan be agreed by a number representing 75% in value of those present and voting in a class who would receive a payment, or which has a genuine economic interest in the company, in the relevant alternative. The term "genuine economic interest" is also used in relation to the exclusion of certain creditor classes.
The test can be interpreted expansively, and the court retains discretion to take into account other factors and interests outside of purely the plan company.
This more expansive approach to a genuine economic interest is demonstrated in Nasmyth  EWHC 988, where HMRC, which had voted against the plan, was forecast to receive nil return under the relevant alternative (an insolvent administration).
Notwithstanding the anticipated nil return, which, if considered in isolation, would indicate that very little (if no) weight should be attached to HMRC's views, Mr Justice Leech considered that HMRC retained a genuine economic interest regardless, on the basis that:
- it was a substantial creditors of the wider group (not just the plan company) – it was owed £2,961,674.42 plus interest, £2,561,499.38 of which was owed by companies other than the plan company.
- the success of the plan was dependent on HMRC agreeing time-to-pay arrangements with group entities which had not been incorporated into the restructuring plan, and those time-to-pay arrangements had not yet been agreed.
Exclusion of creditors who are 'out of the money'
Where certain classes of creditors or members are "out of the money" (that is, they would unlikely receive any return under the relevant alternative), the plan company can apply to the court under section 901C(4) of CA 2006 to have that class excluded from participating in meetings and voting. The court will only order this if such classes have no genuine economic interest in the relevant alternative.
To date, there have been a number of cases where "out of the money" creditors have been allowed to vote on the restructuring plan, rather than being excluded. The reasons for this include that there may be challenges made by such creditors to the valuation evidence and arguments that they are not in fact, "out of the money" (Fitness First  EWHC 1699).
To the extent that "out of the money" creditors have no genuine economic interest and do vote, whether in favour or opposition, the general approach of the court is that little weight should be attached to their views.
The court's general discretion to sanction
Even if Condition A and Condition B are satisfied, such that the criteria for the court to apply the cross-class cram down are met, the court retains discretion to consider other factors in relation to whether a restructuring plan should be sanctioned.
In considering whether to exercise the court's discretion, the court has commonly relied on an adapted version of the test which would be applied in relation to schemes of arrangement under Part 26 of CA 2006, including under Noble Group  EWHC 3092:
- First, consider whether the statutory provisions have been complied with.
- Second, whether the classes were fairly represented.
- Third, consider whether the restructuring plan is a fair plan which a creditor could reasonably approve.
- Finally, consider whether there is any "blot" or defect on the restructuring plan.
Compliance with statutory provisions
Compliance with the statutory provisions includes questions of class composition and that the statutory majorities required for the plan have been met (including, if relevant, for the cross-class cram down). The court will also consider whether creditors were provided with an adequate explanatory statement.
Fair class representation
This may also include consideration of whether the majority of any of the classes were coercing the minority in order to promote interests adverse to the class whom they purported to represent. For example, this could include where certain creditors are significant creditors across a number of classes and seek to reject the proposal even where certain of the classes in which they sit are either not compromised, or not substantively compromised, by the proposed plan.
Account will also be taken of the turnout and voting percentages, albeit the court has accepted that there may be apathy in voting where creditors have accepted they have little or no economic interest (DeepOcean  EWHC 138).
Are the terms of the plan fair?
One of the main battlegrounds in restructuring plans which have been proposed to date is whether the terms of the plan itself are fair, usually with a focus on the allocation of the benefits brought by the restructuring – often referred to as the "restructuring surplus".
Mr Justice Johnson in Great Annual Savings Company  EWHC 1141 provided some guidance on the way in which the court will approach this (emphasis added):
"A more pertinent question to ask […] is whether the plan provides a fair distribution of the benefits generated by the restructuring between those classes who have agreed to it and those who have not, notwithstanding that their interests are different. If it does provide a fair distribution, that is likely to indicate that the negative vote of the dissenting class was not rationally motivated, which would support sanctioning the plan despite the dissent. And the converse is also true: if there is not a fair distribution, that is likely to indicate that the dissenting class has voted rationally, and that would support the Court refusing sanction"
As part of determining whether the plan provides a fair distribution, consideration will be given to the statutory order of priorities in the relevant alternative. In Great Annual Savings Company, Mr Justice Johnson noted that the benefits of the restructuring surplus being conferred on different classes of creditors was being done for reasons which were not clear or which were unconvincing. This included certain creditors who would receive nothing or a very minimal amount under the relevant alternative, and who were making no contribution to the restructuring, receiving more than HMRC under the restructuring plan. This was despite HMRC's recovery under the relevant alternative being substantively higher than those other classes.
Fairness: departure from the order of priorities
In Re Houst  EWHC 1941, Mr Justice Zacaroli considered the position under Chapter 11 of the United States federal bankruptcy law, which is similar to that of the English restructuring plan. Under Chapter 11, there is an "absolute priority rule" which means a class with lower priority cannot recover until any more senior dissenting class has recovered in full.
Based on case law to date, it has widely been accepted that this is not the position under English law. However, consideration of whether the plan involves a fair distribution provides protection that such rights are taken into account and only departed from in circumstances which justify it.
Such circumstances may include where the relevant class is providing new money, or taking on additional risk, in the restructuring and which may therefore justify that class receiving a greater share of the restructuring surplus (Great Annual Savings Company  EWHC 1141).
In addition, where certain creditors are either critical to the ongoing trading of the plan company post-restructuring, or where the inclusion of them would be otherwise impracticable, undesirable and/or disproportionate, the court may be satisfied that such creditors can be paid in full and not included within the restructuring plan.
'Instrument of abuse'
The court may also take into account the engagement of the plan company with classes affected by the restructuring plan, as well as whether the plan is being used as an "instrument of abuse" to cram down creditors at whose expense the company may have been trading.
These factors will largely depend on the circumstances of the case, but may include the urgency at which a sanction of the restructuring plan is required, the period of trading while liabilities have been being incurred and/or whether there are any apparent causes of the current financial difficulties (see for example: Nasmyth and Prezzo  EWHC 1679).
A 'blot' or defect
Finally, a "blot" or defect on the restructuring plan that would, for example, make it unlawful or in any other way inoperable may also prevent the court from exercise its discretion to sanction a restructuring plan.
An example of this is demonstrated in Nasmyth, where the fact that other companies within the same group as the plan company had not agreed time-to-pay agreements with HMRC constituted a "roadblock which prevent[ed] the Plan from taking effect in the manner in which the Company and its creditors intend". This is because ongoing trading within the wider group required the agreement of these time-to-pay arrangements.
Osborne Clarke comment
The developing body of case law regarding restructuring plans has demonstrated that there are a wide variety of factors which can affect the court's willingness to sanction (or not) a restructuring plan.
While each decision will turn on its facts, key considerations for a company proposing a plan will be whether (and for what reasons) it considers the allocation of the restructuring surplus is fair, bearing in mind the statutory order of priorities in the relevant alternative and any new money or risk being put in, as well as any factors outside of the plan which may prevent it from taking effect in the way it was intended.
This article is part of Osborne Clarke's restructuring plan series, which explores the key developments affecting restructuring plans and the developing body of case law in this area.