Restructuring plans post-Adler: English court approves McDermott's restructuring plan, Aggregate required to re-convene meeting

McDermott restructuring plan approved amidst parallel settlement negotiations

The English court has given the green light to the restructuring plan (the Plan) proposed by CB&I UK Limited, part of the McDermott Group, marking the first such approval since the Court of Appeal’s pivotal decision in the Adler case (see our previous update).

The Plan forms part of a multinational restructuring of the McDermott International Group, and combines an "amend and extend" of the Group’s secured debt, with a compromise of certain large “out of the money” unsecured claims. These claims included a $1.3bn arbitration award in favour of Colombian company Refinería de Cartagena S.A.S. (Reficar). Trade creditors and equity are to be left whole.

To ensure effectiveness against creditors of two Dutch companies in the Group, two Dutch restructuring plans or “WHOAs” were proposed in parallel with the Plan. The Dutch and English proceedings are inter-dependent, with both the Plan and WHOAs needing to be approved for each to take effect. With the English Plan now sanctioned, the Dutch hearings are expected to take place in mid-March, followed by a Chapter 15 hearing for recognition in the U.S. later this month.

Opposition

The Plan faced fierce opposition from Reficar, leading to a six-day sanction hearing. Simultaneously, settlement discussions were underway, playing out alongside the court proceedings.

During the course of the sanction hearing, the Group made an improved offer to Reficar of equity in one of the Dutch WHOA companies – described by the judge as “essentially what Reficar had been asking and negotiating for”. However, Reficar’s failure to accept the proffered compromise, at least during the course of the hearing, ultimately derailed its case.

Key takeaways from the judgment:

The court’s approval of McDermott’s plan hinged on several points:

• Relevant alternative: McDermott successfully satisfied the court that the relevant alternative to Plan was a worldwide formal liquidation of the Group. Reficar had argued that negotiations could lead to a consensual deal (offering Reficar a share of equity), followed by a new Plan. This argument was fatally undermined by its failure to accept the equity offer which was on the table. The judge did not give any credence to other “relevant alternatives” which Reficar subsequently sought to advance.
• Adequate compensation: In Adler, Snowden LJ stated (obiter) that a mere confiscation or expropriation of rights would not satisfy the requirements of Part 26A, and that there must some form of “give and take”. However, he also considered that a modest amount of compensation for the compromise of rights would be sufficient. While the consideration offered to Reficar under the Plan was a mere drop in the ocean compared to its $1.3bn claim, it was sufficient to satisfy this low jurisdictional threshold.
• Allocation of the restructuring surplus: Despite Reficar being “out of the money” in the relevant alternative, the judge initially had some sympathy with its arguments regarding the retention of equity by existing shareholders. Existing shareholders might have received a share of the restructuring surplus (due to possible value in the equity post-restructuring) while Reficar’s debt would be released for next to nothing. However, the substantial equity allocation to Reficar subsequently proposed rendered its arguments on this point essentially a nullity.

Aggregate looks once again at expropriation of rights

Hot on the heels of the Adler and McDermott decisions, the English court considered an application to sanction the restructuring plan (the Original Plan) proposed by Project Lietzenburger Straβe Holdco S.À.R.L. (Plan Company), part of the Aggregate group.

The Original Plan was proposed to be made between the Plan Company and three classes of creditors: (i) Senior Creditors, whose debt would be restructured; (ii) Tier 2 Creditors and (iii) Junior Creditors (together with the Tier 2 Creditors, the Subordinated Creditors). The debt of the Subordinated Creditors was to be released for no consideration, and the Original Plan was opposed by certain Subordinated Creditors at sanction.

Snowden LJ’s obiter comments in the Adler judgment, to the effect that an expropriation of rights for no consideration could not constitute a “compromise or arrangement”, forced a rethink of the terms of the Original Plan.

Accordingly, the Plan Company sought an amendment to the Original Plan at the sanction hearing (the Amended Plan). Under the proposed Amended Plan, the necessary element of give and take would be achieved by granting Tier 2 Creditors an aggregate total of €150,000 for the release of their rights, while Junior Creditors would receive €50,000 in aggregate.

Richards J found that he had no jurisdiction to sanction the Original Plan, due to the lack of any “compromise or arrangement” with either class of Subordinated Creditors. It followed therefore that the court had no jurisdiction to approve amendments to the Original Plan or to sanction the Amended Plan.

However, the court was satisfied that the Subordinated Creditors would not receive any payment in the relevant alternative of liquidation. Accordingly the court made an order:

• convening a further meeting of Senior Creditors to vote on the Amended Plan; and
• providing that Subordinated Creditors were not required to participate in a meeting to vote on the Amended Plan, as none of the members of that class had a genuine interest in the company (in accordance with s. 901C(4) Companies Act 2006).

The further Plan Meeting was held on short notice, as the Senior Creditors had overwhelmingly supported the Original Plan and indicated that they would continue to support the Amended Plan. It was quickly followed by a supplemental sanction hearing at which Richards J sanctioned the Amended Plan.

David Steinberg comments: one of the interesting factors in the McDermott and Aggregate decisions was how the judges in those cases addressed the "expropriation" issue raised by Snowden LJ in Adler. Both judges adopted Snowden LJ’s reasoning that it is not legitimate for either a restructuring plan or a scheme of arrangement to seek to allocate zero value to even "out of the money" creditors’ claims, since that would undermine the concept of such a plan or scheme being a "compromise" or "arrangement" with creditors. However, both judges also accepted that allocating even a "de minimis" or purely notional consideration to "out of the money" creditors would suffice to "tick the compromise box".