The Court of Appeal overturns the sanctioning of the Adler restructuring plan

Why should I read this?

The English Court of Appeal has upheld the appeal of a group of dissenting noteholder creditors objecting to the sanction of the restructuring plan relating to Adler, a German real estate group.

This is the first time the Court of Appeal has considered restructuring plans (which were introduced in June 2020) and the judgment provides useful judicial guidance on the cross-class cram down procedure, as well as a reaffirmation of the sanctity of the pari passu principle, which provides for greater certainty on the implementation of restructuring plans going forward.

Key points addressed by the judgment include:

1. A plan which winds up the company as an alternative to a liquidation must provide for a pari passu distribution of the post-restructuring value provided under the plan unless there is a good commercial justification for differential treatment resulting from the value that creditors are providing to the restructured company (i.e. new money or continued trading/employee relationships).
2. Cross-class cram down involves the court considering the allocation of the restructuring surplus which necessarily involves a consideration of whether an alternate plan could have been put forward which would have provided for a fairer allocation of value.
3. Retention of equity by existing shareholders who had not provided any new value was found not to be unfair.
4. The plan company must make available supporting materials for valuations, parties must co-operate to narrow issues for the court and provide for a timetable which factors in time for a contested hearing.

The Court of Appeal judgment is available at: Strategic Value Capital Solutions Master Fund LP & Ors v AGPS BondCo PLC (Re AGPS BondCo PLC) [2024] EWCA Civ 24 (23 January 2024) (bailii.org)

In the matter of AGPS Bondco Plc [2024] EWCA Civ 24

AGPS Bondco Plc (the “Plan Company”) is a member of the Adler group of companies, whose business consists of the purchase, management and development of residential real estate in Germany. From 2022 the group’s business suffered significant adverse impacts as a result of domestic and global economic problems giving rise to a sharp decrease in the demand for real estate.

The group sought to implement various restructuring solutions; after these did not meet with the support of creditors, the group announced its intention to implement a restructuring via an alternative route, namely a restructuring plan in the English courts pursuant to Part 26A of the Companies Act 2006. To that end, the Plan Company was substituted in place of the group’s parent company Adler Group SA (a company incorporated in Luxembourg) as the issuer of senior unsecured notes which were split into six classes. The substitution was, as described by the Court of Appeal, “carried out for the sole purpose of introducing an English company into the Group structure in order to persuade the English court to exercise its jurisdiction under Part 26A”. The use of this technique did not arise for consideration in the appeal and the Court of Appeal noted that it wished “to make it clear that the fact that this judgment does not deal with this issue should not be taken as an endorsement of the technique for future cases”.

The restructuring plan had achieved sanction in the High Court in April 2023. In granting the sanction the judge (Leech J) exercised the court’s discretion to implement a cross-class cram down pursuant to section 901G Companies Act 2006, which allows the court to sanction a restructuring plan notwithstanding that the plan has not received the requisite approval of one or more classes of creditors (the requisite level of approval being 75% in value of those present and voting in each class meeting).

The statutory conditions under section 901G that must be satisfied for the court to have the ability to exercise (at its discretion) its cross-class cram down powers are:

• Condition A: that the court is satisfied that if the plan is sanctioned, none of the members of the dissenting class would be any worse off than they would be in the relevant alternative; and
• Condition B: that the compromise or arrangement has been approved at a class meeting by a class who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative.

In the circumstances of the Adler restructuring plan, in one class out of six, the required 75% majority was not achieved, though in the remaining five classes it was.

Leech J concluded that both conditions under section 901G were satisfied and chose to exercise the court’s discretion to cram down the dissenting class and sanction the plan. This dissenting class was comprised of the holders of notes that were due to mature in 2029 (referred to in the judgment and this article as the “2029 Noteholders”).

It was accepted that the relevant alternative was an insolvency process in which creditors would rank pari passu.

Delivering the judgment of the Court of Appeal Snowden LJ described the pari passu principle in the following terms:

“the rationale for a pari passu distribution is to ensure that losses in an insolvency are borne equally, i.e. that any ultimate shortfall in the assets available for payment of the claims of creditors is borne rateably by all creditors”.

A central argument of the 2029 Noteholders was that due to the maturity dates of the notes that they held being later than the maturity dates of other notes, they were assuming greater risk than other noteholders under the terms of the restructuring plan (because in the relevant alternative they would get pari passu treatment). They contended that the plan represented a departure from the pari passu principle and that no good reason had been shown for this differential treatment of the 2029 Noteholders as regards the holders of the other notes.

The Court of Appeal upheld this argument, commenting that “the payment of the different series of Notes sequentially under the Plan thus carried 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 … adherence 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”.

The Court of Appeal was of the view that the restructuring plan represented a “clear departure” from the pari passu principle. Snowden LJ emphasised that “a key issue for the court in exercising its discretion to impose a plan upon a dissenting class is to identify whether the plan provides for differences in treatment of the different classes of creditors inter se and, if so, whether those differences can be justified”. This departure from the pari passu principle created a “fundamental unfairness” to the 2029 Noteholders and this differential treatment could not be justified. The appeal was allowed.

The Court of Appeal also emphasised that, while the courts will always do what they can to accommodate the business needs of their users, “the court’s willingness to decide cases quickly to assist companies in genuine and urgent financial difficulties must not be taken for granted or abused”. Parties looking to implement restructuring plans should therefore act (in conjunction with their advisers) in a timely manner and seek to allow sufficient time for the Part 26A process to be properly conducted, bearing in mind that such a process may well become contested.

Why does this matter?

This is the first restructuring plan case that has been considered by the Court of Appeal. Whilst it is not clear what the next steps (and the ultimate outcome) for the Adler group itself will be, this judgment provides important guidance around restructuring plans and in particular the cross-class cram down power and its interaction with the pari passu principle.

Companies considering implementing restructuring plans in future should be alive to the issues considered in the Court of Appeal in order to increase the chances of a restructuring plan being sanctioned – and that sanction not being subsequently overturned on appeal.

How Eversheds Sutherland can assist

Should you require advice on Part 26A restructuring plans, or restructuring and insolvency procedures more generally, Eversheds Sutherland can leverage its market-leading strength and depth of experience in these areas to assist. For more information or guidance, please get in touch with your usual Eversheds Sutherland contact, or one of the individuals below.