The recent UK Court of Appeal judgment on the Adler Restructuring Plan is the first time that the Court of Appeal has considered a Restructuring Plan since its inception in 2020. In this article, we discuss the key practical lessons that stakeholders should take from the Adler judgment (as well as the subsequent High Court judgments in McDermott and Aggregate) when considering implementing a restructuring through a UK Restructuring Plan.
What is a Restructuring Plan?
Introduced by the UK Corporate Insolvency and Governance Act in 2020, plans have many similarities with the well-established UK Scheme of Arrangement process. A Plan allows debtors to bind all their creditors (and members) to a restructuring provided that it is approved by the requisite majorities and sanctioned by the UK Court. The Court may split those voting on the Plan into one or more different classes based on their respective rights – if a creditor’s rights are so different from another that it would be impossible for them to consult together with a view to their common interest, they will be split into separate classes. Where a Plan involves more than one class, for the Plan to be approved it will need to either be voted for by (i) 75% by value of each class or (ii) 75% by value of at least one “in the money” class (i.e., a class that would stand to receive some economic benefit in the most likely outcome if the restructuring is not implemented) with the UK Court agreeing to exercise its discretion to impose “cross-class-cram-down” (CCCD) on the other class(es) that did not meet the 75% voting threshold. Prior to the introduction of Plans, CCCD had not previously been possible in UK restructurings.
What is a Restructuring Plan?
Introduced by the UK Corporate Insolvency and Governance Act in 2020, plans have many similarities with the well-established UK Scheme of Arrangement process. A Plan allows debtors to bind all their creditors (and members) to a restructuring provided that it is approved by the requisite majorities and sanctioned by the UK Court. The Court may split those voting on the Plan into one or more different classes based on their respective rights – if a creditor’s rights are so different from another that it would be impossible for them to consult together with a view to their common interest, they will be split into separate classes. Where a Plan involves more than one class, for the Plan to be approved it will need to either be voted for by (i) 75% by value of each class or (ii) 75% by value of at least one “in the money” class (i.e., a class that would stand to receive some economic benefit in the most likely outcome if the restructuring is not implemented) with the UK Court agreeing to exercise its discretion to impose “cross-class-cram-down” (CCCD) on the other class(es) that did not meet the 75% voting threshold. Prior to the introduction of Plans, CCCD had not previously been possible in UK restructurings.
What happened in Adler?
Adler is a large landlord and property developer in Germany. After a number of challenges including, in particular, reduced demand for residential and commercial real estate through 2022, Adler decided to restructure to provide itself with sufficient liquidity to carry out a controlled wind down of its portfolio (on the basis that this would generate better returns for creditors than would be the case if it were to sell assets in a fire sale). Following a series of failed consent solicitations to implement the proposed changes, Adler proposed a Plan to amend its six series of senior unsecured notes (with staggered maturities each year from 2024 through to 2029) to, amongst other things, extend certain maturities and also permit it to raise new secured indebtedness.
The Plan placed each of the note maturities in its own creditor class and required a majority in all classes. All voted in favor of the Plan besides the 2029 notes. The High Court elected to use CCCD on the 2029 notes class and approved the Plan in April 2023, but this was subsequently overturned by the Court of Appeal in January 2024.
Key Practical Lessons
1. How would each creditor class be treated in the ‘relevant alternative’ (i.e., the most likely outcome if the restructuring is not implemented) and, to the extent the Plan departs from this treatment, is there a compelling justification for it doing so?
The relevant alternative in Adler was an insolvent liquidation where several different classes of noteholders with scheduled maturities from 2024 to 2029 would rank pari passu. The Court found that retaining the scheduled maturities of the notes in the Adler restructuring (and thereby diverging from the pari passu treatment in a liquidation) was a departure from the treatment of the relevant alternative that could not be justified. The one exception to this was the elevation in priority of the 2024 notes which was justified on the basis that the 2024 noteholders had provided additional support to the restructuring by agreeing to a one-year maturity extension. Given that the relevant alternative in most Plans is likely to be an insolvent liquidation, temporarily subordinated creditors are likely to enjoy a stronger position in restructuring negotiations – any departure of the Plan terms from the pari passu treatment in the relevant alternative would need to be justified. Related to this, dissenting creditors in both McDermott and Aggregate, argued that the relevant alternative put forward by the debtor was not in fact the most likely outcome if the restructuring were not implemented. However, both challenges were ultimately dismissed and, going forward, challenges like this will be difficult for creditors to sustain because the debtor (i) only needs to demonstrate that the relevant alternative is the most likely outcome on a balance of probabilities and (ii) has far better access to the information needed to substantiate the basis for their relevant alternative.
Key Practical Lessons
1. How would each creditor class be treated in the ‘relevant alternative’ (i.e., the most likely outcome if the restructuring is not implemented) and, to the extent the Plan departs from this treatment, is there a compelling justification for it doing so?
The relevant alternative in Adler was an insolvent liquidation where several different classes of noteholders with scheduled maturities from 2024 to 2029 would rank pari passu. The Court found that retaining the scheduled maturities of the notes in the Adler restructuring (and thereby diverging from the pari passu treatment in a liquidation) was a departure from the treatment of the relevant alternative that could not be justified. The one exception to this was the elevation in priority of the 2024 notes which was justified on the basis that the 2024 noteholders had provided additional support to the restructuring by agreeing to a one-year maturity extension. Given that the relevant alternative in most Plans is likely to be an insolvent liquidation, temporarily subordinated creditors are likely to enjoy a stronger position in restructuring negotiations — any departure of the Plan terms from the pari passu treatment in the relevant alternative would need to be justified. Related to this, dissenting creditors in both McDermott and Aggregate, argued that the relevant alternative put forward by the debtor was not in fact the most likely outcome if the restructuring were not implemented. However, both challenges were ultimately dismissed and, going forward, challenges like this will be difficult for creditors to sustain because the debtor (i) only needs to demonstrate that the relevant alternative is the most likely outcome on a balance of probabilities and (ii) has far better access to the information needed to substantiate the basis for their relevant alternative.
2. Is the relative treatment of creditors’ classes in the Plan fair?
When the Court is asked to cram down a dissenting class, it will now consider whether the relative treatment and allocation of value between creditor classes are fair, including considering whether an alternative restructuring proposal would provide for a more equitable allocation of value between creditor classes (the so-called horizontal fairness in distribution of the restructuring surplus). This is in addition to, and somewhat distinct from, the condition to the exercise of the CCCD requiring the Court to ask if dissenting creditors are “no worse off” under the Plan than they would be in the relevant alternative. Without the latter, the Court cannot exercise its discretion — the former is a key consideration when exercising the discretion. When considering whether a Plan is fair, the Court cannot simply apply the “intelligent and honest man” test previously applied in Schemes and, further, one cannot simply rely on even overwhelming support from consenting creditor classes as a justification to cram down a dissenting class (i.e., the Court cannot defer to creditor democracy). By definition, the rights of creditors in different classes were viewed as so dissimilar that they could not consult together in the common interest and absent this common interest, the levels of support of consenting creditors are irrelevant to whether a Plan should be imposed on a dissenting class. In Aggregate, the Court provided further clarification when it held that it was for the debtor and creditors that would be “in the money” in the relevant alternative to decide on a fair relative treatment of creditors (and out of the money creditors should not have a say).
3. How have creditors been split into classes for the purposes of voting on the Plan?
In Adler, the company took what the Court described as a ‘conservative’ approach to class composition by placing each of the different notes maturities in its own class and then seeking to rely on the Court’s discretion to cram down a dissenting class. Given that all creditors under the different notes would rank pari passu in the relevant alternative, their rights going into the Plan were not so different and they could have been put into a single class, which given the overall support would have removed the need to rely on CCCD. The main differentiating factor amongst the proposed classes was in fact the rights coming out of the Plan without necessarily any justification for it, thus creating a certain artificiality in the class composition. Going forward, classes are likely to be a sensitive subject especially where seemingly similar-ranking creditors are split into different classes to rely on CCCD.
4. What valuation evidence is provided to support (or challenge) a Plan (including comparative analysis of alternative restructuring proposals)?
Debtors proposing a Plan will need to provide robust valuation evidence to the Court to demonstrate that (i) no creditor class will be worse off under the Plan than in the relevant alternative and (ii) the treatment/allocation of value between creditor classes is fair. The other side of this coin is that dissenting creditors are also likely to put forward alternative restructuring proposals to show that the allocation of value in the debtor’s restructuring proposal is unfair (although we expect that it will continue to be challenging for creditors to present valuation evidence that is as compelling as that put forward by the debtor, owing to the debtor’s immediate knowledge about its business).
5. How are the rights of out of the money creditors treated in the Plan?
A Plan needs to involve some element of “give and take” for all parties (including out of the money creditors). This means that, whilst the Court is entitled to disenfranchise out of the money creditors from voting on a Plan, their rights cannot simply be expropriated by the Plan. That being said, in both McDermott and Aggregate the Court held that whilst some kind of payment to out of the money was required, a marginal payment would be sufficient to satisfy the need for “give and take.” This confirms the Court’s approach from the pre-Adler case of Smile Telecoms where the claims of out of the money creditor classes were extinguished in exchange for a de minimis payment of £10,000 to the whole class.
6. Do the commercial restructuring terms that have been negotiated between stakeholders fit the Court’s framework for Plans?
The restructuring that Adler proposed to implement through its Plan was substantially the same as the one it had earlier attempted to implement through a consent solicitation. Going forward, we expect there to be a shift away from the “build them as they go” approach to restructurings. Stakeholders will need to ensure that the commercial terms of the restructuring fit within the Court’s framework for plans (rather than expect the Court’s process to be so malleable that it can be shaped to fit whatever commercial deal is agreed).
7. Have stakeholders engaged with the Court in a timely manner?
The Court stressed the importance of it being given sufficient time to properly conduct a contested Plan hearing. What constitutes sufficient time will depend on what is driving the debtor’s burning platform — the Court will likely be more sympathetic to work to a more compressed timeline where the restructuring is needed for the debtor to meet critical operational liabilities (such as payroll) rather than where timing is driven by the scheduled maturities of financial instruments. At the same time, it is likely that the timetable for Plans will expand considering the new framework for Plans. The impact of this is that the window for debtors to negotiate and implement a Plan continues to narrow (particularly in light of the 2021 decision in Hurricane Energy, where the Court held that where a debtor had sufficient liquidity to continue to trade for 12 months it could not determine that the most likely relevant alternative to the restructuring was that the debtor would be placed into an insolvent liquidation).
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