On 23 January 2024, the Court of Appeal handed down its much anticipated judgment[1] on the appeal of the Adler restructuring plan pursuant to Part 26A of the Companies Act 2006 (“RP”), which was sanctioned by the High Court on 12 April 2023[2], with judgment setting out the reasoning for that decision handed down on 21 April 2023.

For those new to the world of RPs, we refer you to our overview here as a “beginner’s guide” to the terminology and basic process involved in an RP.

In allowing the appeal, Lord Justice Snowden (with whom Lord Justice Nugee and Sir Nicholas Patten agreed) provided a helpful framework for those looking to implement a RP, in particular highlighting where the principles applied to schemes of arrangement will differ where the cross-class cram-down (“CCCD”) feature of the RP is, or is likely to be, engaged. In practice, this will mean that restructuring professionals should apply these principles to every RP situation as it is not always clear when CCCD will be required at the outset.

Following the Court of Appeal’s judgment, we set out below some practical take-aways, and questions to consider, when preparing an RP.

Although, notwithstanding the detailed and helpful judgment, there are a number of issues which were not necessarily a matter for the Court of Appeal to consider on this occasion, but which leave a number of uncertainties for the Adler RP and RPs more generally.

Practical takeaways/considerations when preparing an RP

Is the timetable proposed appropriate?

Outcome: sufficient time for the proper conduct of a contested RP must be factored into the timetable. Woe betides those who cry wolf unnecessarily.

The question of urgency and appropriate timetabling is becoming a real issue for judges generally. While the judgment recognises the need for urgency in certain cases, “the court’s willingness to decide cases quickly to assist companies with genuine and urgent financial difficulties must not be taken for granted or abused… sufficient time for the proper conduct of a contested Part 26A process must be factored into the timetable.” The failure of parties to properly consider timetabling and urgency of the hearing may well contribute to the likelihood of quick judgments, appeals being made and the uncertainties listed below coming to fruition more frequently.

The message here is a simple one: leave adequate time for the restructuring and don’t try to rush an RP through unnecessarily.

Has sufficient disclosure been made?

Outcome: An Explanatory Statement should provide sufficient information to allow creditors to readily understand the different treatments and risks as between creditors and the party proposing the RP must provide such information as is sensibly required by parties impacted by the RP in order to assess what is being proposed.Such information should include differing treatment between creditors, deviation from the pari-passu principle, and any risks to repayment under the RP. An unclear Explanatory Statement or inadequate or slow disclosure of supporting information may fatally undermine the RP such that the court will not sanction it.

Class composition

Outcome: The principles used in a scheme of arrangement should be applied.

A class “must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interests”. However, this is broad – differences in rights may be more than de minimis without necessitating separate classes. Consideration should also be given to the rights that that class would have in the “relevant alternative”.

Discretion to sanction – where no application of CCCD power by the court is necessary

Outcome: Again, the principles used in a scheme of arrangement should be applied.

The court must be satisfied that the plan is fair (although not necessarily the only fair or best plan) and one that an “intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve”. Members or creditors are better judges of their own interests than the courts. Subject to there being some “blot” found on the plan, the courts will be slow to differ from the meeting consensus.

Discretion to sanction – application of CCCD by the court requested

Outcome: Where an application of CCCD is requested of the court, the principles established for a scheme of arrangement need to be modified, with varying significance.

• Fairness and the rationality test: the court will disapply any rationality test based on the level of voting, or the value of claims voted in assenting and dissenting classes as a whole to justify applying CCCD, but will look to engage with the underlying commercial issues. Further, the court will not use the “intelligent and honest man” test to impose terms on dissenting creditors whose class interests are different to those of assenting creditor classes; the fact that one class approves the RP provides no information about the fairness of imposing an RP on dissenting classes with different interests.
• Vertical comparison: the statutory requirements for the RP and CCCD conditions must be met, but this in and of itself does not give rise to a presumption in favour of CCCD and sanction; the court must still consider whether to exercise its discretion in light of all the relevant factors and circumstances.
• Horizontal comparison: it is appropriate for the court to conduct horizontal comparisons in a CCCD scenario, and any differences in treatment of classes of creditors inter se must be justified – there should be a fair distribution of the benefits of the RP, over and above the relevant alternative, between those classes who have agreed the RP, and those who have not. There needs to be a compelling reason to persuade the court to sanction a RP which allocates the benefits differently between classes of similar standing in any material respect. These are concepts familiar to practitioners from previous challenges to Company Voluntary Arrangements, and the Court of Appeal’s adoption of these in the circumstances seems logical.
• Is there a deviation from the pari-passu principle? The court will need to be persuaded that there is a good and proper justification for departing from the pari-passu principle in an RP. This does not mean that all parties should be treated equally, but rather that they should be treated in line with what their rights would be in the relevant alternative. Assuming that this is most likely to be an administration or liquidation, this means respecting what the waterfall of priorities would look like in that alternative, but also taking account of what would happen in practice in such scenarios, for example, duress creditors being paid in full where a pre-pack administration sale is being conducted, or employees being paid to retain those employees and allow the business to trade.

Following the above approach, and without providing an exhaustive list, the court found that deviation might be justified where:

• creditors provide an additional benefit or accommodation to assist the achievement of the RP in the interests of creditors as a whole (for example, the provision of new money being repaid in priority to existing creditors); or
• trade creditors or employees which are vital to the continuation of the business and success of the RP being necessarily paid in full rather than compromised.

In each case such deviation should be proportionate (which is, of course, likely to be a subjective test).

• Is there a better or fairer plan? The court should consider whether a different allocation of assets would be possible, and whether an alternative arrangement would have been fairer. In practice, this means that shareholders who attempt to use an RP unduly aggressively are likely to face disappointment.

Uncertainties

Notwithstanding the useful analysis provided in the Court of Appeal’s judgment, there remain a number of uncertainties as regards the practical impact of the judgment on the Adler RP, and RPs more generally.

• Is there a practical benefit of the appeal? Given the effectiveness of the RP sanction was immediate and the High Court judge was not requested to suspend the terms of the RP until such time as it was clear that an appeal was or was not going to be made, the RP was implemented in April 2023. One has to question then how the RP, which has largely been implemented, can now be unravelled? Adler Group S.A. has publicly announced that it continues with its restructuring plan as planned: “The decision of the Court of Appeal to set aside the Sanction Order has no effect on the previously implemented financial restructuring of Adler Group’s indebtedness as the amendments to the terms and conditions of its bonds remain in full force in accordance with German law”. While the purported urgency of the initial sanction hearing may have contributed to the failure to request or order the suspension of the RP being commenced, it is something which likely needs to be addressed in future.
• Issuer Substitution as a way into the jurisdiction of the English courts: While acknowledging that Issuer Substitution was carried out for this sole purpose, the judgment does not expressly deal with whether or not this pathway into the jurisdiction of the English courts is a sound technique or an artificial device which could impact on the court’s willingness to accept jurisdiction.
• Will consideration always be necessary when cancelling shareholder rights? Provisionally, the court noted that it has no jurisdiction to sanction a compulsory cancellation or transfer of shares for no consideration. But what consideration might be adequate? Is a cursory one pound enough? It is likely to be fact specific.

Other Considerations

• Complex valuation disputes seem likely to continue: time pressures in producing valuation reports in short order (often in a matter of weeks or even days), and without giving experts time to meet and narrow issues, is likely to result in stronger grounds to dispute any such expert findings. Companies should be providing relevant materials that underly the valuations upon which it relies, and failure to do so, or a general lack of underlying evidence, risks the RP being challenged.
• Does this judgment make it less likely that RPs will be available to SMEs? While the initial intention was that RPs would be available to SMEs, it is becoming increasingly burdensome to satisfy the detailed and extensive information requirements. This, together with the likelihood of appeal, makes an RP ever more exclusive to the large corporate with deep enough pockets (while encountering, or likely to encounter financial difficulties) to justify the cost.

Lessons from Adler can be summarised as: be timely, be transparent and be fair if you want to rely on the court’s discretion to apply CCCD.

It is yet to be seen whether there will be a further appeal to the Supreme Court.

[1] [2024] EWCA Civ 24

[2] [2023] EWHC 916 (Ch)