After Virgin Atlantic and Pizza Express achieved ‘too much consent’ and did not need cross-class cram down in the end, DeepOcean is the first judgment applying cross-class cram down as part of a restructuring plan.
On 13 January 2021 at the sanction hearing, the UK High Court (Mr Justice Trower) sanctioned the restructuring plans for the DeepOcean group of companies. However, appreciating the significance of a groundbreaking decision, Trower J reserved judgment and on 28 January handed down his reasons. Here we discuss interesting points arising from the judgment and draw together learning and guidance for future cases.
Full details on the background to the case can be found on our post from 18 January, so we will get straight into the detail.
On the evidence, the court was clear what the relevant alternative was (namely, a liquidation). At the first hearing, the court was presented with two alternative insolvency scenarios and had decided which one was the most likely eventuality if the plan did not come into effect. It is helpful to know for future cases that the court is willing, based on the evidence, to take a definitive view. This is particularly so as it can be difficult to identify the relevant alternative (ie counterfactual), which leads to complexity around the financial consequences for some or all of the plan creditors in the relevant alternative.
Dissenting class must be no worse off
This is Condition A to cross-class cram down (in the Companies Act 2006, s.901G). This was clear in DeepOcean as not only were dissenting class members no worse off with the plan than in the liquidation but also in fact each of them would be clearly better off (4 per cent versus 0 per cent).
This may not always be the case and the court laid a marker that ‘no worse of’ is a ‘broad concept’. It would be necessary to consider the impact of the plan on all incidents of the liability to the creditor concerned (not simply amount of dividend). Trower J specifically mentioned matters such as timing and the security of any covenant to pay.
Artificiality in creation of classes
While there was no sign of artificiality in DeepOcean, the court flagged, as it did in Virgin Atlantic, that it is alert to the potential to artificially create classes to ensure the requirements of Condition B would be met. The court stated that it would revisit the conclusion it had reached on classes at the convening hearing where the possibility of artificiality only became apparent at the sanction hearing.
The court’s discretion to sanction
The court underscored that it has discretion to sanction a restructuring plan irrespective of the voting and conditions being achieved - it is not a rubber stamp. However, legislation gives little guidance on the factors that may be relevant.
Here are some of the factors the court considered in DeepOcean.
Deviation from scheme case law
For schemes, there is a consistent line of cases from 1966 onwards that states that the court will be ‘slow to differ from the meeting’ of creditors. The judge acknowledged that this does not work for restructuring plans with cross-class cram down. If the court sanctions such a plan, necessarily, it will exercise its power to differ from the dissenting class meeting.
The court noted that its power to override the decision of a dissenting class can be exercised whether the value of the dissenting votes against the plan is 26 per cent or 100 per cent. This is helpful guidance for future cases where the number of plan creditors in the dissenting class who vote against could be higher than in the DeepOcean case.
Just and equitable
Where a plan company is seeking sanction of a restructuring plan and wishes to invoke cross-class cram down then, as long as Conditions A and B are met, the court will focus on whether a refusal to sanction is appropriate because the restructuring plan is not just and equitable in respect of the dissenting class. Put differently, the court will not ask positively why justice and equity requires the plan to be sanctioned.
Indeed, the court went further and states that the explanatory notes to the legislation indicate that ‘an applicant company will have a fair wind behind it if it seeks an order sanctioning a restructuring plan notwithstanding a dissenting class where the section 901G conditions A and B are met’.
The court considered the relatively low turnout at the meetings (between 25 and 32 per cent) for the classes that were constituted of trade creditors (as compared to finance creditors, which was 100 per cent). However, the court was neither concerned nor surprised by this – demonstrating that the court is prepared to take a practical and pragmatic approach. The court did however want to check that the plan creditors had been fairly represented at the vote and they had been able to engage properly, as opposed to simply choosing not to do so.
Horizontal comparator and the restructuring value
The court noted that one of the factors that goes to its discretion is the relative treatment of creditors under the plan. This, the court noted, has much in common with the horizontal comparison in company voluntary arrangements.
The court also noted that because ‘a class right of veto is removed by cross class cram down, justice may require the court to look at questions of horizontal comparability in the context of a cross-class cram down to see whether a restructuring plan provides for differences in treatment of creditors inter se, and if so whether those differences are justified’.
In particular, the court is concerned to ascertain whether there has been a fair distribution of the benefits of the restructuring (the ‘restructuring surplus’) between those classes who have agreed the restructuring plan and those who have not. Here, differential treatment was justified (because of the secured versus unsecured nature of the respective claims), but it may be more complex in other cases.
On the facts of DeepOcean, the court found it relatively easy to sanction the plans (and to utilise cross-class cram down for one of the plans).
Some particularly relevant points for DeepOcean were as follows:
- Conditions A and B were met without difficulty.
- Only one of the three interconditional restructuring plans (the DSC plan) had failed to achieve the required statutory voting threshold in one of the classes (the unsecured ‘Other Plan Creditor’ class). Conversely, in both the DO1 and ES plans, a similar Other Plan Creditor class had voted in favour. The judgment notes the read-across between similar classes in interlinked plans. Put another way, the fact that all Other Plan Creditors would receive the same percentage uplift on the liquidation value of their claims against the three different DeepOcean plan companies meant that each would be concerned with very similar questions at their respective meetings, even though they could not be placed in the same class because their claims were against different debtor companies.
- There was no challenge to the restructuring plans and no evidence as to why any of the plan creditors who voted against the restructuring plan did so. No plan creditor contended it was unfair or otherwise that the court should refuse sanction, ie there was no active opposition.
- None of the creditors who voted against the restructuring plan contested the entity priority model (which formed the evidence for the relevant alternative).
- The plan creditors in the dissenting class were out of the money in the relevant alternative (where they would have recovered nothing) and therefore had no economic interest in the company. There is precedent for excluding more junior classes from a (traditional) scheme of arrangement when they are out of the money (Tea Corp, MyTravel).
- The benefits received under the terms of the restructuring plan were provided by DeepOcean entities other than the plan companies. So these voluntary payments were incremental benefits under the plan that would not arise in the relevant alternative of insolvency.
The sails of cross-class cram down are filling with the fair wind of DeepOcean, a well-reasoned judgment that not only starts to set out the practical details but also suggests the new restructuring regime works.
There are bound to be choppier waters ahead with more complicated fact patterns or active opposition, and it will be exciting to see how this develops over the course of 2021. However, the voyage has certainly started well: cross-class cram down in the UK works!