Dissenting creditors bound by restructuring plan in UK first

The decision will provide greater clarity for companies and insolvency practitioners seeking to implement restructuring plans under Part 26A of the Companies Act 2006.

• Restructuring plans for DeepOcean group are sanctioned by the High Court, binding a dissenting class of creditors for the first time under UK law.
• The plans allow for a solvent wind-down rather than a rescue of the group.
• In the matter of DeepOcean I UK Limited, In the matter of DeepOcean Subsea Cables Limited, In the matter of Enshore Subsea Limited [2020] EWHC 3549 (Ch) and [2021] EWHC 138 (Ch)

A restructuring plan is a new form of restructuring tool introduced in June 2020 by the introduction into law of the Corporate Insolvency and Governance Act. This is only the third time that a restructuring plan has been sanctioned in the UK, and it is the first time that the so-called 'cross-class cram down' mechanism has been used.

This case sets a significant precedent for the future use of restructuring plans. Whilst further test cases will inevitably be required, the case shows that the courts are willing to give effect to the new features of the Part 26A "super schemes", and will bind a dissenting class of creditors when it is required to do so. 

The case also resolves a legal uncertainty that had arisen following the sanction hearing of the first UK restructuring plan, concerning Virgin Atlantic Airways. In that case, the judge declined to consider whether a class of creditors who had already agreed to vote in favour of the restructuring plan – i.e. were 'locked-up' – could bind a class of creditors that voted against a restructuring plan. This created a legal uncertainty as to whether the cross-class cram down mechanism could be used in these circumstances.

In the case of DeepOcean, the secured creditor class had already agreed a 'lock-up' arrangement, which meant the court was forced to consider the issue when the unsecured creditors did not approve the plan. The decision to sanction the use of the cross-class cram down despite the lock-up agreement has resolved this uncertainty.  

The decision also provides practical guidance on what evidence the court finds helpful and what factors the court will consider when deciding whether to exercise its power to bind dissenting creditors:

• The creditor turnout and level of support for the plan will be carefully considered by the court, particularly in the case of the dissenting classes;
• The court will review whether the restructuring plan treats creditors differently amongst themselves, and if so, whether those differences are justified. This is known as questions of "horizontal comparability";
• If the conditions set out above are met, a company will have "a fair wind behind it" in obtaining the court’s sanction.

Background

The DeepOcean group is a leading provider of subsea services to global offshore industries. Following a period of financial difficulty, the group launched three restructuring plans in parallel in respect of three UK subsidiaries. The restructuring plans proposed a solvent and fully funded wind down, which would avoid the negative impact of insolvent liquidation on the rest of the group. This is the first time a restructuring plan has been used in the UK to facilitate a solvent wind down, as opposed to a rescue.

Convening hearing

At the convening hearing, the judge, Mr Justice Trower, agreed it was appropriate to convene the plan meetings as proposed.

One of the conditions under section 901A of the Companies Act 2006 for proposing a plan is that the purpose of the compromise or arrangement must be "to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties" that are affecting the ability to carry on business as a going concern. As the purpose of the plan was to facilitate a solvent wind down rather than support continued trading, the judge had to consider whether this condition would be satisfied.

Mr Justice Trower concluded that the condition would be satisfied on the basis that the plan had, "at its purpose, a lessening or reduction in the gravity or seriousness of the effect of [the company's] financial difficulties". The companies' financial difficulties were considered sufficiently serious so as to give rise to the possibility that they would not be able to carry on business as a going concern. The judge also considered that the implementation of the proposed plans would give rise to a better result for the restructuring plan creditors, compared to an insolvency. The alternative was an administration or liquidation, as well as potential enforcement by the secured creditors, which could lead to bankruptcy filings against parent company, DeepOcean Group Holding BV, amongst other group entities.

Plan meetings

The plan meetings were convened. This involved meetings of four separate "classes" of creditors: the secured creditors; UK landlord creditors; UK vessel owner creditors, and; other unsecured creditors.

At the meetings, two of the three restructuring plans were approved by the requisite majority of creditors in each class. In relation to the third restructuring plan, which only had two classes of creditors, one class voted unanimously in favour of the plan, but approval was not given by the second class of creditors. The requisite 75% majority in value of creditors voting was not achieved, with only 64.6% of unsecured creditors voting in favour of the plan.    

Sanction hearing

At the sanctioning hearing, as a result of the unsecured creditors voting against the proposed restructuring plan, Mr Justice Trower was required to consider whether the cross-class cram down mechanism should be put into practice for the first time in the UK.

Under section 901G of the Companies Act 2006, a restructuring plan can still be sanctioned by the court where one or more classes do not vote in favour of the plan provided that the following conditions are met:

• ·none of the dissenting class would be worse off in the relevant alternative; and
• the plan had been approved by at least one class of creditors who would have had a genuine economic interest in the relevant alternative.

The court sanctioned the three restructuring plans, confirming that the statutory tests for doing so were satisfied and that this was an appropriate case to exercise the court’s discretion and bind the dissenting class of creditors.

The use of the cross-class cram down mechanism was justified on the basis that:

• the class of creditors that voted in favour of the plan were not ‘artificially’ included to enable a cross-class cram down in the event that another class of creditors did not approve the plan;
• a substantial majority of the unsecured creditors in the dissenting class still voted in favour and no reasons were provided to the judge by those creditors which explain why they voted against the plan; and
• importantly, the alternative would be to deprive the entire class of unsecured creditors of a better outcome than would be the case if the restructuring plan was approved.