Taking the new restructuring plan to the wire: the inside track on Hurricane Energy

The Hurricane restructuring plan was the first to seek to implement a debt-for-equity swap, the first to include a plan meeting of shareholders as a separate class, and the first plan in which the court declined to exercise its new cross-class cram down powers.

Background

Hurricane Energy plc is an AIM-listed, UK-focused oil and gas company. In 2017 it completed a $300m (£215m) equity fundraising and issued $230m in 7.5% convertible bonds due in July 2022. Reduced production from its well and reduced current and forecast oil prices meant Hurricane expected that it could not repay the bondholders on maturity. Hurricane proposed a restructuring plan under which inter alia the bondholders would reduce the amount outstanding to them by $50m and extend the maturity date of the bonds in exchange for 95% of the equity in Hurricane, to allow an extended period of production and an enhanced return to bondholders (but not shareholders).

The relevant alternative to the restructuring plan (s901G(3) and (4) Companies Act 2006 (CA 2006)) was considered to be a shorter controlled wind down of Hurricane's business, with production ceasing ahead of the bond maturity date and the company complying with its decommissioning and other obligations. In this scenario, while bondholders would receive a better return than on an immediate liquidation, shareholders would receive no return and would be no worse off under the restructuring plan than the relevant alternative. 

Shareholders opposed the restructuring plan on the grounds that it was premature, market conditions were improving, the business was currently cash generative, and alternatives to the plan were available.

The convening judgment 

Zacaroli J found that existing shareholders' rights are ‘affected’ (s901C(3)) by a restructuring plan seeking to propose a debt-for-equity swap, which would dilute shareholder equity in the company, as shareholders’ rights to participate in the capital and profits of the company would be affected (notwithstanding that, according to Hurricane, the shareholders would receive nothing in the relevant alternative, and CA 2006 disapplies anti-dilution and pre-emption rights where a plan is proposed). They were therefore entitled to vote on the plan, subject to the potential overriding of their decision by cross-class cram down.

The sanction judgment – why did the court disagree? 

The court will not permit a cross-class cram down of a dissenting class unless it is satisfied that, if the plan were to go ahead, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative. 

In determining whether shareholders were ‘any worse off’ under the restructuring plan, the court did not accept Hurricane’s relevant alternative and identified ‘realistic’ possibilities that may in the time available enable Hurricane to discharge its obligations to bondholders and may result in a return to shareholders. Particular care was needed in the application of cross-class cram down where this would have the effect of depriving shareholders of all but a fraction of their interest in the company.

Should directors now 'wait and see' in a debt-crunch scenario?   

The decision illustrates the difficulties that can be faced by companies with a debt due in the mid-term, and which on reasonable forecasts they will be unable to pay. This dilemma increases where (as with Hurricane) large amounts of capex are payable well in advance, and there are risks in continuing to trade, even where the business is cash generative. 

Each case will turn on its facts, but the decision emphasises that the burden is on the plan company to satisfy the court that a dissenting class should be crammed down, even where, on available projections, those parties are ‘out of the money’. That burden is harder – but not necessarily impossible – to satisfy if the company is not facing imminent insolvency.   

Companies and directors should still act early to address liquidity issues before it is too late, and restructuring plans will be an important potential solution. The Hurricane decision is an early and instructive example of the courts starting to outline the limits of the application of the new cross-class cram down procedure.

The importance of the court's discretion

The court would (if necessary) have refused to sanction the restructuring plan as a matter of discretion. This is an important reminder that the satisfaction of the tests required for cross-class cram down may not, of themselves, be sufficient to achieve sanction.

The authors’ firm served as advisers for Hurricane Energy Plc.

Neil Griffiths is a partner and the head of Dentons UK and Middle East Restructuring and Insolvency Group.   

Luci Mitchell-Fry is counsel in the Restructuring and Insolvency Group.

Jonathan Sears is a senior associate in the Restructuring and Insolvency Group.