Cross-class cram down takes the plunge
09 February 2021
The High Court has, for the first time, sanctioned a restructuring plan exercising the power to cross-class cram down. The court handed down its sanction order but noted that, as the first decision to use cross-class cram down, a reasoned judgment will follow in due course.
On 13 January 2021, the court sanctioned three inter-conditional restructuring plans (the restructuring plans) for three subsidiaries of DeepOcean Group Holding BV (together with all of its subsidiaries, the DeepOcean Group):
- DeepOcean 1 UK Limited (DO1);
- Enshore Subsea Limited (ES); and
- DeepOcean Subsea Cables Limited (DSC) (together, the plan companies).
The plan companies form the cable-laying and trenching group (CL&T group) of the DeepOcean Group and specialise in providing subsea services to global offshore industries.
The restructuring was necessitated by the continued poor performance of the CL&T group, which has placed a worsening financial strain on the wider DeepOcean Group.
The restructuring plans
The restructuring plans were proposed with four creditor classes:
- secured creditors under a multicurrency facilities agreement, comprising three drawn-down facilities and one undrawn facility;
- the UK landlord of DO1;
- the owners of two vessels chartered by DO1; and
- 'unsecured creditors' being holders of any claim against the plan companies other than the three aforementioned groups and certain excluded claims (eg suppliers, sub-contractors, etc.).
The restructuring plans for DO1 and ES were both approved with the requisite majority following virtual creditor meetings held on 6 January. However, the restructuring plan for DSC was not: the secured creditors voted unanimously in favour while the unsecured creditors voted with only 64.6% by value (instead of the statutory requirement of 75%, there being no requirement of greater than 50% by number in a restructuring plan) in favour (although a relatively low proportion of the total members of this class voted at the meeting).
Cross-class cram down
Consequently, the court was requested to exercise its discretion in applying cross-class cram down for the first time under the new UK regime in order to sanction the DSC restructuring plan. Under s901G of the Companies Act 2006, cross-class cram down is available where the following conditions are met:
- Condition A: the court is satisfied that, if the compromise or arrangement were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative; and
- Condition B: the compromise or arrangement has been approved by the requisite 75% in value of a class of creditors present and voting who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
The Companies Act states that 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'. In this case, the plan companies submitted evidence that the relevant alternative was an administration or liquidation of the plan companies.
In arguing that both conditions to cross-class cram down were met, counsel for the plan companies noted that:
- Condition A: unsecured creditors would receive at least a 4% increase under the restructuring plans than in the relevant alternative, so could not be considered any worse off; and
- Condition B: the secured creditors under the DSC restructuring plan would have received a payment in the relevant alternative (an administration or liquidation).
The court’s discretion
Counsel for the plan companies noted that, even when conditions A and B are satisfied and the court therefore has jurisdiction to sanction a plan against the wishes of a dissenting class, the court has discretion to do so. This is clear from the wording of part 26A ('the court may… sanction the compromise or arrangement') as well as the explanatory notes to the Corporate Insolvency and Governance Act 2020, which state that the 'court may refuse sanction on the ground that it would not be just and equitable to do so'.
In the absence of any guidance for the court in how to exercise its discretion, counsel suggested four factors for the court regarding exercise of its discretion:
- 'Just and reasonable' will necessarily differ from the 'fairness' test applicable to a scheme of arrangement. This is because 'fairness' only applies where the requisite majority of creditors have approved the scheme; whereas cross-class cram down will only be required where the threshold has not been met.
- Meeting condition A is only a necessary jurisdictional entry condition, but is in itself not su
- The additional factors to be considered concern the relative treatment of stakeholders as between each other, whether between creditors and stakeholders, or between classes of creditors.
- The interests of other stakeholders will be relevant, not just those of the dissenting class of creditors.
Counsel submitted that the third factor is likely to be the most complex one, noting that the premise of a restructuring plan is that it will lead to a 'restructuring surplus', ie the creation of a benefit that would not exist under the alternative circumstance (here, the administration or liquidation of the plan companies).
Counsel submitted that the question as to whether the relative treatment of creditors is fair will depend on how this surplus is divided among the stakeholders under the restructuring plan. In the absence of any guidance legislation on how to determine fair treatment, the clearest approach where the relevant alternative is an insolvency, counsel submitted, is to distribute the surplus among stakeholders as would be the case in insolvency – and any deviations from this order would need to be carefully justified.
Similarly, counsel noted, any deviations from the equal treatment of creditors who rank in the same way would need to be justified. Here, counsel noted that there may be a close analogy with the 'horizontal comparator' in relation to company voluntary arrangements, where the differential treatment of unsecured creditors who rank in the same way may be possible, but only if there is a proper commercial jurisdiction for such different treatment.
In the present case, counsel noted that the senior creditors were prepared to waive their rights to the restructuring surplus and it was shared between unsecured creditors.
Moreover, counsel noted that the relative treatment of the unsecured creditors was fair and equitable. Each received a similar uplift on the recovery which they would make in a liquidation.
Other notable features
Quite apart from the issue of cross-class cram down, there are a few other interesting features of the restructuring plans.
Mitigating the effect of financial difficulties
One of the entry criteria for a restructuring plan is that the plan’s purpose is to 'eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties'.
Here, the restructuring plans were not going to restore the companies to a position where they could carry on business as a going concern, rather the aim of the plans is to ensure a slightly enhanced dividend in the ultimate wind down of the companies.
At the convening hearing, Trower J confirmed this could be treated as mitigating the effect of financial difficulties, 'irrespective of whether or not there is any intention for the company to continue carrying on business as a going concern'.
The restructuring plans include a bar date for lodging claims (three months after the restructuring plans become effective). If creditors do not submit a notice of claim by the bar date, they will not be entitled to receive any plan consideration, but it will nevertheless be bound by the terms of the restructuring plans.
We will have to await the court’s reasoned judgment to see whether it agreed with the approach above and what further guidance can be gained for future cases.
It is also interesting to see that the DSC restructuring plan was approved with only a 4% increase for the dissenting class versus the relevant alternative. While any increase over the relevant alternative will suffice, for the first restructuring plan to succeed on this low percentage may embolden others to use the tool. However, this may here be a factor of the rather unusual feature of the plans, providing for an orderly wind down, rather than a continued going concern.
There are other interesting features of the restructuring plans here, such as the fact that they involve the setting of a bar date for lodging claims (three months after the restructuring plans become effective). If creditors do not submit a notice of claim by the bar date, they will not be entitled to receive any plan consideration, but it will nevertheless be bound by the terms of the restructuring plans.
With the first German restructuring plan and Dutch scheme also commencing this week, a range of new UK/European tools are opening up. This is excellent news given the likely increase in restructuring later in 2021, and interesting times lie ahead.
The judgment can be found here.
Katharina Crinson is counsel at Freshfields Bruckhaus Derringer LLP.
Richard Tett is a partner at Freshfields Bruckhaus Derringer LLP.
Frederick Money is a trainee solicitor at Freshfields Bruckhaus Derringer LLP.