On 6 October 2020, the England and Wales High Court approved the second scheme of arrangement proposed by Codere (an international gaming group) in a little over five years, following a fully contested convening hearing spread over three days.
In the convening judgment ( EWHC 2441 (Ch)), the Court concluded that the various fees payable to the members of an ad hoc committee of scheme creditors did not fracture the single class proposed by Codere.
However, the Court’s consideration of the issues should be considered a warning shot regarding the types of fees and benefits that, with a different fact pattern, could impact class composition in the context of schemes of arrangement under Part 26 of the Companies Act 2006 and, by extension, a restructuring plan under Part 26A.
Below we set out some key takeaways from the judgment.
Bridge financing (and related fees/benefits)
Consider whether it is necessary or appropriate to include bridge financing terms in lock-up agreements (including appended term sheets) and, if so, what conditionality should be attached. In any event, it will be important to demonstrate that funding and fees are on competitive market terms and without any element of 'bounty'.
In line with previous decisions, this case demonstrates how the Court is often uneasy working with fees paid to ad hoc committees or groups. Companies and relevant lenders may want to consider whether it would be possible or appropriate to re-characterise or justify the fees on another basis, such as a monthly fixed amount, or as a 'success fee'.
Similar to bridge financing, it will be important to be able to provide evidence that a backstop is required, and that the fees are at a commercial level, for example by comparing them to the market rate for comparable underwriting services provided or offered by a third party.
A separate engagement letter or agreement to pay independent of the scheme is preferable to wrapping these up in a lock-up agreement.
It will be important to consider the cumulative effect of all fees and benefits (including where it will be argued the relevant fees or benefits are not relevant to the class analysis), and to be aware that the Court may wish to see granular evidence on how the fees impact recoveries or returns for different creditor groups.
Restructuring plans and cross-class cram down
The same test for class composition will apply to restructuring plans as applies to schemes. (In its judgment on the recent Virgin Atlantic restructuring plan, the Court made it clear that it recognised the potential for gerrymandering of classes.)
However, the ability to use 'cross-class cram down' in a restructuring plan means that, where there is a risk a class may be fractured, it is likely to be a relevant consideration that a restructuring plan will offer additional implementation flexibility in the event the Court decides any classes should be fractured.
For more on the Court's decision, download our briefing (PDF).