The High Court has refused to use its discretion to sanction a restructuring plan proposed by Waldorf Production UK Plc (Waldorf or the Company) which entailed a cramdown of the company’s unsecured creditors pursuant to Part 26A of the Companies Act 2006.

Background

Waldorf (and its wider group) are engaged in the exploration and production of oil and gas in the UK Continental Shelf (the “UKCS”). At a very high level, and for the purposes of the proposed restructuring plan, the Company had three classes of creditors: (i) bondholders who had lent monies under various bonds issued by the Company and who benefitted from certain security (the “Bondholders”), (ii) HMRC, an unsecured creditor owed c.US$75m (representing EPL and certain corporation tax liabilities), and (iii) a contractual counterparty (“Capricorn”) owed c.US$29m pursuant to deferred consideration arrangements under a previous sale transaction.

Waldorf cited various reasons for its financial distress, but it appears the key reasons for its liquidity crunch were: (i) the new energy profits levy (“EPL”) introduced by the UK Government in 2022 imposing a windfall tax on the profits of oil and gas companies operating in the UK or UKCS, which was increased and extended by the Government, and (ii) a US$76m dividend that had been declared and paid by reference to certain management accounts (later shown to contain important omissions) in October 2022 – the majority of which flowed up to Waldorf’s ultimate beneficial owners (two individuals who were also directors of Waldorf at the relevant time).

Although secured creditors are typically able to realise most (if not all) of their debt by enforcing their security, a particular nuance in this case was that the secured creditors hands were somewhat tied – the complex regulatory environment governing oil and gas operations in the North Sea meant that the Bondholders could not simply sell the assets of the Company (for example, potentially via a pre-pack administration) but rather needed to sell the entire Company, which meant that the HMRC and Capricorn unsecured debts needed to be dealt with, or otherwise compromised.

As such, the objective of the Waldorf restructuring plan was to enable the Company to continue trading whilst it explored options for a solvent sale.

Key Points and Analysis

Relevant Alternative: There was debate around what the genuine “relevant alternative” was for Waldorf were its restructuring plan not sanctioned – the Company submitted that it was a distributing administration or a liquidation which would yield nil returns for the unsecured creditors. In contrast, HMRC and Capricorn suggested that the relevant alternative was in fact a different restructuring, rather than a terminal administration or liquidation process.

This is not the first time that dissenting creditors who were sought to be crammed down by a restructuring plan have argued that the relevant alternative may in fact be a different restructuring plan/ consensual deal – on better terms for them (see Re Thames Water, Petrofac), however, it is an argument that has yet to get judicial backing – perhaps because a plan company proposing a Part 26A Restructuring Plan will necessarily be experiencing financial difficulties and any realistic alternative scenario will need to be capable of implementation prior to the date of the sanction hearing (which is often cited as a cliff-edge for plan companies).

Having said that, Waldorf was unusual in the sense that the “benefits generated by the restructuring are easy to articulate” as Hildyard J noted. HMRC and Capricorn had argued that the secured creditors stood to receive between US$46.6 – 80.2m (with the potential for additional upside) if a solvent sale of the Company was achieved and “[t]he idea that these sophisticated commercial entities will throw a very significant upside away in a fit of pique, refuse to talk to HMRC and [the unsecureds] and petition for the Plan Company’s winding up is fanciful”. Nonetheless, Hildyard J “with reluctance” found that the relevant alternative was either administration or liquidation.

Fairness/ Allocation of Value: The Company’s initial submission was that because the relevant alternative was a formal insolvency, in which HMRC and Capricorn stood to receive nothing, it was fair that these under-water creditors are given a de minimis payment in exchange for the discharge of their claims. The Waldorf plan offered each of HMRC and Capricorn a (somewhat arbitrary) 5% recovery.

The Company had apparently erred in focusing on what the unsecured creditors would receive in an insolvency rather than whether there was a fair allocation of the benefits of the restructuring. The objective of the plan in this case was “to realise some economic advantage from continuation of the Plan Company as a going concern” (whether that was a sale of the Company or gain some other benefit or relief), and Hildyard J followed the recent guidance handed down by the Court of Appeal in Re Petrofac that  “what falls to be assessed in determining the fairness of the Plan at the discretion stage is whether what the Plan would achieve is a fair and reasonable allocation of the benefits of the Restructuring having regard to the amounts contributed by each creditor class, including the class proposed to be crammed down”.

Two key takeaways from Re Petrofac were of relevance in this case – firstly, the burden of establishing that the plan is fair is for the plan company to discharge. Secondly, it is also clear from Re Petrofac that the pattern and results of previous negotiations between the plan company and the class of creditors sought to be crammed down will provide useful insight into whether there was fair and reasonable negotiation or the relevant class “has in truth been seeking to extract too much in term of value from its right of veto”.

Waldorf had in fact failed to engage with Capricorn and HMRC in formulating its restructuring plan and Hildyard J also found that it had not considered what might constitute a fair allocation of the benefits of the plan to the unsecured creditors – rather, it appeared that the Bondholders had arbitrarily decided to pay a certain amount over what the under-water creditors would be entitled to in an insolvency scenario.

Decision/ Reasons for refusal of sanction

The statutory test for sanctioning a cross-class cramdown in a Part 26A restructuring plan is as follows:

  • Condition A: No worse off in the “relevant alternative”. This test, as noted above, was found to be satisfied.
  • Condition B: Plan is agreed by a class of creditors (comprising at least 75% in value of that particular class) “who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative”. This test was also satisfied by virtue of the Bondholders unanimously supporting the restructuring plan.

The trump card in all these cases, however, is judicial discretion. This is the final “safeguard” envisaged by the legislature before a court ultimately sanctions a restructuring plan and is of particular importance where a court is being asked to cram-down a class of dissenting creditors. Ultimately, this is the hurdle that Waldorf failed by omitting to engage with its out-of-the-money creditors prior to convening the class meetings and/or give adequate consideration to the allocation of the benefits of its restructuring plan.

Although the High Court refused to sanction Waldorf’s plan, Waldorf is seeking to appeal the decision directly to the Supreme Court – missing out an appeal to the Court of Appeal having obtained permission from that court to “leapfrog” this stage.  The Supreme Court must now decide whether permission to appeal will be given. 

If the appeal proceeds, the primary question the Supreme Court will be asked to consider is: whether fairness to ‘out-of-the-money’ creditors ought to be assessed by reference to what those creditors would likely receive in the relevant alternative if a plan fails (as suggested by Virgin Active), or by reference to what those creditors, properly informed, would fairly and reasonably expect to be paid to give up their claims so as to enable the expected benefits of the restructuring to come into fruition were the plan sanctioned and implemented.

The answer to this question, if considered by the Supreme Court, will be pivotal in shaping the approach taken by future plan companies in dealing with “out-of-the-money” creditors.  Presently companies considering a plan must be guided by the stance taken by the Court in Re Thames Water, Re Petrofac and now Waldorf.

If the Supreme Court grants permission to appeal to Waldorf, we expect that the appeal being pursued by Petrofac will be considered at the same time. 

Guidance from the Supreme Court on these important points is welcome. It would provide more certainty to plan companies on the planning, consultation and structure of restructuring plans, potentially reduce the number of challenges and appeals and in turn restore confidence in the process.

UPDATE: Since writing this blog Petrofac has announced that it has reached an agreement with SAMSUNG E&A and Saipem in respect of its claims enabling a restructuring to proceed with their consent. Although this will mean that Petrofac’s appeal to the Supreme Court will no longer go ahead, we can still hope to get guidance if the Supreme Court grants permission to Waldorf.