Restructuring Plan Cramdown

Frances CoulsonSenior & Managing Partner, Head of Litigation & Insolvency, Moon Beever

In Re DeepOcean I UK Ltd & Ors [2021] EWHC 138 (Ch) Trower J sanctioned a restructuring plan that had been agreed by the statutory majority in value at each of various meetings summoned but not by the statutory majority in value at the meeting of a class of “Other Plan Creditors” at which it was approved by only 64.6% in value so did not meet the statutory threshold, the requirements for sanction under section 901F Companies Act 2006 not being satisfied.    Section 901F in Part 26A Companies Act 2006, inserted by Schedule 9 Corporate Insolvency and Governance Act 2020,  now affords the court jurisdiction to sanction a compromise or arrangement in the form of a restructuring plan if a number representing 75% in value of the class of creditors present and voting at a meeting summoned under section 901C votes in favour of the plan. Unlike in the case of a scheme of arrangement under Part 26 of the Act, there is no requirement for a majority by number. However, section 901F is subject to section 901G of the 2006 Act (see section 901F(2)) which provides:
“(1) This section applies if the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors or (as the case may be) of members of the company (‘the dissenting class’), present and voting either in person or by proxy at the meeting summoned under section 901C.(2) If conditions A and B are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning it under section 901F.”
Conditions A and B are also set out in section 901G:
“(3) condition A is that the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (see subsection (4)).(4) for the purposes of this section ‘the relevant alternative’ is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F.(5) condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.”
So, as Trower J observed,
“Section 901G…introduces a procedure by which a dissenting class can be bound by a restructuring plan. In the Explanatory Notes to CIGA, this is called ‘cross-class cram down’. It follows from the very nature of the court’s powers under section 901G that, while a number of the matters which the court is required to consider are the same as the familiar questions which arise on any application to sanction a scheme of arrangement under Part 26 of the 2006 Act, additional questions arise where the cross-class cram down provisions are engaged and sought to be relied on. As I will explain, these differences include matters going to the court’s discretion.”
Trower J appears to have taken a number of matters into account both generally and specifically in exercising that discretion:
the absence of evidence of the reasons why the dissenting creditors voted against the restructuring plan;the level of turnout to vote;the overall voting percentages and numbers (which the judge analysed in some detail): as he said, “As to the weight of votes more generally, more than 99% of all claims against DSC by value voted in favour of the Restructuring Plan”;the absence of any collateral factor affecting voting;the relative treatment of creditors under the proposals (cf the “horizontal comparison” that the court may carry out when considering a challenge to a company voluntary arrangement);whether there was anything in the formulation of the restructuring plan giving rise to concern as to how it would operate in practice as a mechanism for varying creditor rights and effecting a distribution of the available assets.
On condition A, Trower J said that the primary question for the court when comparing a restructuring plan with what was likely to be the alternative was to look at the likely financial return in each case. He said,
“Doubtless, the starting point will normally be a comparison of the value of the likely dividend, or the amount of any discount to the par value of each creditor’s debt. However, the phrase used is ‘any worse off’, which is a broad concept and appears to contemplate the need to take into account the impact of the restructuring plan on all incidents of the liability to the creditor concerned, including matters such as timing and the security of any covenant to pay.”
He concluded in the case before him that no member of the dissenting class would be any worse off, and in fact each would be better off.
“As to condition B, he found that the evidence established that it too was satisfied in that each creditor would make a small recovery out of charged assets to be realised. Sanctioning the scheme, he said:
“In the present case, the benefits to be received under the terms of the Restructuring Plan by all of the Other Plan Creditors…are to be provided by DeepOcean group entities other than the Plan Companies. This factor, combined with the fact that the DSC Other Plan Creditors are out of the money in the relevant alternative is in my view a powerful pointer towards sanctioning the Restructuring Plan by use of the power under section 901G.”
Whilst building on Snowden J’s recent judgment in Re Virgin Atlantic Airways Ltd, Trower J said, “[I]t seems to me that a slightly different approach is required on an application to sanction a Part 26A restructuring plan where the applicant seeks to rely on the provisions of section 901G.”  He noted that,
“The words of the statute give little guidance on the factors that are relevant when the court is exercising its discretion to sanction a restructuring plan. But I think that, even where section 901G is in play, the approach the court adopts when sanctioning a scheme of arrangement under Part 26 of the 2006 Act, or a restructuring plan under Part 26A where the provisions of section 901G are not relied on (as to which see Virgin Atlantic), is the right starting point.”
That said, in his view, a reluctance to differ from the meeting could not be given the same weight when the court was sanctioning a restructuring plan to which section 901G applied as it did on an application to sanction a Part 26 scheme of arrangement. Trower J’s judgment appears to be the first to consider and use sections 901F and G, but it is probably a starting point rather than the last word on the topic. The facts militating in favour of sanction were compelling, and, more importantly, the dissenting creditors did not appear in this case to argue their corner.