The Adler Aftermath: From Colombia to Germany, Junior Creditors Crammed and Compromised

In Short 

The Situation: Following the seminal Adler judgment, the English Court has now ruled on a further two contested restructuring plans ("RPs"). These two judgments provide important commentary relevant to all parties considering or affected by a RP.

The Result: The English Court has provided further guidance on the requirement for RPs to constitute compromises rather than expropriations, the circumstances in which forum shopping may be considered acceptable, and the requirement for contesting parties to come before the court with evidence and with good conduct. 

Looking Ahead: These decisions further solidify the utility of RPs as powerful tools available to reshape the balance sheets of financially distressed cross-border groups, being capable of effectively shedding substantial liabilities which are "out-of-the-money," whether used on their own or in conjunction with parallel proceedings in other jurisdictions (including U.S. Chapter 11 or Chapter 15 proceedings). The cross-class cram-down and the absence of the absolute priority rule provides economic stakeholders with significant leverage and opportunity.

Following our previous Adler update, two further RPs have come before the court, namely:

  • Re CB&I UK Ltd, better known as the "McDermott RP"; and
  • Re Project Lietzenburger Straße HoldCo S.à r.l., better known as the "Aggregate RP."

Both the McDermott and the Aggregate Groups sought the approval of the court for significant amendments to their capital structures. The McDermott Group is an international engineering, procurement and construction group providing services to the oil, gas, and energy sector. By means of a UK Restructuring Plan—the McDermott RP—and parallel Dutch WHOAs (namely a restructuring case under the Dutch Act on Confirmation of Extrajudicial Plans ('Wet Homologatie Onderhands Akkoord'), being the Dutch equivalent to RPs), the McDermott Group sought to amend and extend its secured debt facilities. At the same time, McDermott sought to near-extinguish certain material unsecured liabilities owed in relation to an arbitral award granted against McDermott and in favour of Colombia's Refinería de Cartagena S.A.S ("Reficar"). Other unsecured creditors, such as trade or intra-group creditors, were not prejudiced by the McDermott RP. 

Meanwhile, the Aggregate Group is—like the Adler Group—focused on the development of German real estate. Aggregate's key development, being one of the largest uncompleted commercial real estate projects in Germany, has been unable to achieve completion due to significant unfunded cost overruns. Aggregate was therefore seeking a RP for the purposes of, in summary, putting in place a new super-senior facility, elevating in priority a proportion of the existing debt held by providers of the new super-senior facility and releasing various second and third-ranking secured debts. 

These RPs are the first contested plans to come before the court since the issuance of the Adler judgment. Both judgments contain guidance on the interpretation and treatment of Lord Justice Snowden's judgment in Adler, which will be of importance for the practical preparation and implementation of future RPs. The two judgments also provide guidance on areas where a compromised party could successfully challenge a RP.

The two RPs received different outcomes from the court. The McDermott RP was sanctioned with significant criticism of Reficar's conduct. The Aggregate RP was not sanctioned for the reason noted below (albeit the Aggregate RP was since re-commenced on amended terms and the amended proposal has received court sanction). From the two judgments in these cases, the following key themes can be identified:

  1. Compromise or ArrangementThe Adler judgment confirmed that RPs need to be compromises or arrangements between the parties, rather than the expropriation of one party's rights. This applies even to "out-of-the-money" creditors. The question Adler left open was what constitutes a genuine arrangement—how much consideration should out-of-the-money creditors receive for the release of their valueless claims? Initially, the Aggregate RP did not seek to provide those creditors with any consideration. After a challenge by dissenting creditors, the Aggregate Group sought to amend the plan so as to provide those creditors with a nominal cash payment (equivalent to approximately 0.08% of the relevant compromised claims) and asked the court to sanction the plan on the amended basis. However, due to the fact that the plan as originally proposed afforded no consideration to the out-of-the money creditors the court concluded that there was no compromise or arrangement, and therefore, that it had no jurisdiction to sanction the plan (even on the proposed amended basis). Instead, the court ordered that the Aggregate Group re-convene its creditors' meetings in order to vote on the terms of the amended plan and re-appear before the court for sanction assuming the requisite votes were obtained. By contrast, the McDermott RP provided out-of-the-money creditors with minimal consideration (equivalent to a cash payment of approximately 0.04% of the relevant compromised claims, with scope for additional recoveries in parallel proceedings) and the court endorsed that approach. Given that, absent the RP, those creditors would receive nothing, even minimal consideration was considered sufficient to constitute the necessary "give and take" for a genuine compromise or arrangement to be established.
  2. Horizontal ComparatorAs the "absolute priority rule" (precluding distributions to junior creditors or shareholders unless senior creditors are paid in full) does not apply to RPs, the McDermott RP allowed the shareholders to retain the majority of their equity interests in the McDermott Group (notwithstanding the release of the junior debt claims). The judgment of Mr Justice Green may provide compromised creditors with a basis to argue against shareholders retaining equity value in future cases; this could be on the ground that a RP may not be fair and just if a comparison of the treatment of a debt class and equity shows the improper preference of equity at cost to the debt. On the facts of the McDermott RP, that was not established, but this could be an avenue of challenge in future RPs. Nonetheless, the continued affirmation of the absence of the absolute priority rule was particularly valuable in this case—the shareholders were largely the senior secured creditors, who had acquired the business through a Chapter 11 proceeding. The senior creditors were thereby able to protect their senior debt and equity interests at cost to the junior debt. This is another example of where RPs can be valuable to re-capitalise newly acquired structures and can be useful to cross-holders in the capital structure.
  3. Forum ShoppingThe Aggregate RP involved a Luxembourg-incorporated SARL that utilized a center of main interest ("COMI") shift to make use of an English law RP. The court conducted significant review of the facts of the plan company's COMI (being where it conducted its business) as well as related issues, such as the effectiveness of the proposed RP under relevant local law. The judgment of Mr Justice Richards provides significant comment that questions of a company's COMI should be tested on the objective basis of the facts rather than the subjective question of why a company may have been relocated to a certain jurisdiction. Moreover, the court noted that if a COMI shift had occurred, the court would continue to permit good forum shopping (allowing companies to move to England to benefit from English law procedures in certain circumstances). Although the significant review required of the COMI shift indicates that the court should apply in-depth scrutiny to a company's standing to make use of RPs—as per Lord Justice Snowden's marked note on the use of issuer substitution techniques (albeit that was permitted in the Adler RP)—this judgment provides helpful commentary on the ability of international businesses to continue making use of the established jurisdiction of the English Court to conduct cross-border restructurings.
  4. Opposing an RP (Valuations)Out-of-the-money creditors opposed the sanction of the McDermott RP and the Aggregate RP. In the latter case, the opposing creditors challenged the valuation evidence put forward by the company. The court reaffirmed the previous judgments on this issue; namely, any party wishing to challenge valuation evidence should put its own valuation evidence before the court. Absent manifest error, the court cannot otherwise depart from what valuation evidence is put before it. The Court also criticised the costs incurred by the parties in respect of each RP. However, the requirement for parties to provide substantive valuation evidence, on compressed timelines and on a litigation footing and within the context of in-court proceedings, means that high-value matters will continue to see parties willing to expend significant sums on the preparation of relevant evidence.
  5. Opposing an RP (Parties' Conduct)In its challenge to the McDermott RP, Reficar argued that the "relevant alternative" put forward by the company to justify the terms of its RP was incorrect (the relevant alternative being what would occur were the McDermott RP to not receive court sanction). Recifar claimed that, absent the proposed RP, the parties would agree to an alternative restructuring—rather than enter into liquidation—and that the court should not provide sanction but should allow the parties to continue negotiating an alternative, consensual outcome. The court at first considered this argument to be of some weight. However, it became clear during the course of the proceedings that Reficar was refusing to accept proposals that satisfied its key restructuring asks. Although these were unusual circumstances, the court demonstrated that it was willing to look at the parties' conduct and consider the commercial reality of whether parties would ever be able to come to an alternative arrangement. Likewise in the Aggregate RP, the court noted that the company had made various restructuring proposals, but that none, other than a RP with the exercise of the cross-class cramdown, seemed likely to garner the requisite approvals among its creditors.
  6. Relevant AlternativesWhen reviewing the various arguments made by Reficar in opposition to the McDermott RP, the court also affirmed that a company's directors are usually the parties best-placed to assess the merits of the relevant alternative for a company absent the relevant restructuring (if supported by valuation evidence).
  7. Parallel PlansIn a helpful cross-border development, the court confirmed in the McDermott RP that it would consider the terms of other restructuring processes being implemented in parallel to a RP put before it (provided they form one wider, single restructuring). In considering whether Reficar would receive the appropriate—and fair—distribution of assets, the court was willing to consider the equity in the McDermott Group to be provided to Reficar under the Dutch WHOAs, which were contingent upon approval of the McDermott RP. This provision of equity assisted the court in ensuring the fair and just treatment of the parties.

Three Key Takeaways

  1. 'Good' forum shopping remains expressly permitted by the English courts. RPs are a flexible and powerful tool that should continue to be an instrument for consideration in a wide range of cross-border matters, but parties should be prepared to make an evidentiary showing of key, and contested, legal points.
  1. Even out-of-the-money creditors should receive at least some consideration for the release of their claims under a RP—but that consideration may be minimal. 
  1. Both prior to and following the launch of a RP, the parties should consider their conduct. A willingness or otherwise to negotiate will influence a court's view of relevant alternatives and what is fair and just.
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