Summary
The judgment of the Court of Appeal in Strategic Value Capital Solutions Master Fund LP & Ors v AGPS BondCo PLC (Re AGPS BondCo PLC) [2024] EWCA Civ 24 (Snowden LJ, with whom Nugee LJ and Sir Nicholas Patten agreed) sets out detailed reasons for allowing an appeal against an order of Leech J sanctioning a restructuring plan under Part 26A Companies Act 2006 between the respondent company and its creditors affecting six classes of senior unsecured notes. It is of some importance, being the first appeal to the Court of Appeal on a Part 26A restructuring plan. It deals with important questions concerning the approach which the court should take to the exercise of its discretion to sanction a restructuring plan in circumstances where not all the classes of plan creditors have approved the plan (a power that is generally but inelegantly referred to as “cross-class cram down”) and the application to such plans of the pari passu principle.
The Appeal
Leech J had sanctioned the plan in issue in the face of opposition (Re AGPS Bondco plc [2023] EWHC 916 (Ch)). The plan provided for the restructuring of a company incorporated in England and Wales but which was part of a group, the business of which was developing and managing residential property in Germany. In summary, it involved incorporating a new company in place of the group’s parent and provided for changes to the terms and conditions of a number of series of loan notes: the maturity date of some (the “2024 notes”) was to be extended by one year, and new security was to be given. The new security would have the effect that any proceeds of realisation would be distributed under a “waterfall,” by the terms of which certain costs and expenses would be paid first, followed by certain loan notes given first priority, then the 2024 notes, then finally the five other sets of notes ranking equally among themselves. A report prepared in support of the plan concluded that if it was not implemented it was likely that each of the main companies in the group would go into some kind of formal insolvency proceeding under which the claims of the noteholders would all rank equally as unsecured; they were likely to do better under the plan than any alternative. In sanctioning the plan, Leech J held that the dissenting class, a group of loan note holders, would be no worse off under the plan than they would have been under the relevant alternative.
The appellant noteholders each held notes in the relevant class that did not vote by the required 75% majority to approve the plan. Their case was that the judge below had wrongly exercised his discretion to impose the plan on them.
The Court of Appeal identified eight overlapping grounds of appeal:
(1 & 2): in assessing the fairness of the plan as between the assenting and dissenting classes, the judge had wrongly applied the “rationality test” derived from Part 26 scheme cases;
(3 & 4): he had failed to appreciate that the plan materially departed from the pari passu principle governing the distribution of assets that would apply in the relevant alternative, thereby exposing one group of noteholders to a materially greater risk of non-payment than other noteholders: no good reason had been shown for such differential treatment;
(5 & 6): in exercising the cross-class cram down discretion, he had wrongly attached significant weight to the fact that the plan had been approved by the other classes of noteholders; he had also wrongly treated his finding that the “no worse off test” was satisfied as a factor supporting the exercise of discretion, rather than simply as a necessary precondition to the exercise of the cross-class cram down power;
(7) he had been wrong on the facts to accept the company’s alternative case, i.e. what would be likely if the plan were not approved;
(8) he had been wrong not to accept that under the plan some obligations had been accelerated (one of the arguments was that bringing proceedings under Part 26A amounted, under German law, to bringing an “insolvency proceeding,” which was an event of default under the terms of the notes: the appellants contended that the judge should have found that this was a fundamental defect which was not addressed in the plan).
Many of these points were case-specific. Of particular interest is what Snowden LJ had to say about the pari passu principle, which he described as “the first main theme of the appeal.” There were two aspects to this which were susceptible of attack: the first was the preservation of different maturity dates applicable to different noteholders, requiring a sequential payment of the different series of notes; the second was the priority given to certain notes (the “2024 notes”) under the terms of a scheme of “transaction security” under which the proceeds of enforcement of the security would be applied in accordance with the “waterfall” under which, after payment of certain costs and expenses, new money introduced under the plan would rank first in priority, followed by the 2024 notes, and then the five other series of notes which would rank equally among themselves.
The importance of the pari passu principle
Snowden LJ held that Leech J had erred in finding it likely that all relevant creditors would be paid in full so that there was no risk of offence against the pari passu principle: he had failed to appreciate “the risk that the Group would pay the earlier dated Notes in full, but would run out of money from realisations before being able to pay the 2029 Notes. […] [A]dherence to the principle of pari passu distribution of the Group’s assets would have eliminated that risk by proportionate distributions being made rateably to all Noteholders from time to time. Put shortly, sequential payments to creditors from a potentially inadequate common fund of money are not the same thing as a rateable distribution of that fund.”
Issues as to potential breach of a loan to value covenant also gave rise to potential for breach of the principle, and a process of acceleration and enforcement of security which could prioritise the repayment to the 2024 notes similarly detracted from pari passu distribution and were additional factors going to fairness.
Snowden LJ summarised the position thus:
“Curiously, having made his findings in…that the Plan did not depart from the principle of pari passu distribution, the Judge then correctly and neatly summarised in…the very reasons why that conclusion was wrong. He said,
‘300. I readily accept that the exercise in which all of the valuation and financial experts were engaged was inherently uncertain and that the three alternatives which the parties presented to the Court did not involve clear alternatives but more of a spectrum. I also accept that I do not have a crystal ball and that I cannot be certain that the 2029 [Noteholders] will be paid in full or even that they will recover on a pari passu basis if the Plan Company defaults … Whilst I was satisfied that this was a likely outcome, it remains far from certain.
301. I must accept, therefore, that the Plan involves a greater risk for the 2029 [Noteholders] than it does for the Plan Creditors holding earlier-dated notes and it is possible (although, in my judgment, unlikely) that they might be worse off if they have to wait for the Plan to be implemented than if the Group was put into an insolvency process now.’
Those are precisely the reasons why the Plan did not respect the principle of pari passu distribution, the essential purpose of which, as I have indicated, is to eliminate the risk that creditors might end up bearing the losses of an insolvency unequally.”
Snowden LJ did not go so far as to say that all restructuring plans had to adhere absolutely to the pari passu principle: departure from it could be justified if there were “a good reason or proper basis” for doing so. He did not specify what those might be. In this case, however, he expressed the view that the company could have formulated a fairer plan.
An additional point of note is what Snowden LJ had to say about the weight to be given to voting on the plan in the round:
“[…] I consider that reliance upon the overall level of voting across all classes of creditors is not something that should be taken into account in conducting the horizontal comparison [the relative treatment of the classes of creditors inter se] and deciding whether it is fair or appropriate to cram down a dissenting class.”
Helpful review of caselaw
Apart from emphasising the importance of having proper regard to the principle of pari passu treatment, Snowden LJ’s judgment compares and contrasts Part 26 schemes and Part 26A restructuring plans (paras 3-12 of his judgment) and undertakes a comprehensive review of the statutory provisions relating to restructuring plans and the body of case law that has emerged since their introduction by insertion into the Companies Act 2006 by Schedule 9 Corporate Insolvency and Governance Act 2020 (paras 105-186). As such the Court has provided valuable assistance to all parties considering such restructuring plans going forward by setting out clear guidance on both procedural and substantive matters. Such guidance will be binding on the lower courts bring greater certainty to all parties in turns of the hurdles which they will need to overcome to get prospective schemes across the line.