On 28 June 2021, the UK High Court declined to sanction Hurricane Energy Plc’s restructuring plan. This was the first time a restructuring plan seeking to achieve a debt-for-equity swap against the wishes of existing shareholders had come before the court.
Hurricane Energy is an AIM-listed oil and gas company that extracts oil from offshore reserves. Hurricane proposed a restructuring plan as it considered that it would be unable to repay its $230m unsecured bonds on the maturity date in July 2022. The restructuring plan had proposed a significant dilution of the pre-plan shareholders’ position to only 5 per cent of the equity of the restructured company. The bondholders were due to receive 95 per cent of the equity in exchange for releasing $50m of the bonds and extending the maturity date. At convening, the court had ordered two classes: one for noteholders and a separate one for shareholders.
The plan had been met by fierce resistance from the shareholders, who requisitioned the company’s board of directors to call an extraordinary general meeting at which it is proposed to change the board – this meeting had been due to take place after the sanction meeting on 5 July 2021. At the plan meeting, over 90 per cent of the voting shareholders voted against the plan and a number attended the sanctioning hearing to argue against sanction. The voting bondholders voted unanimously in favour of the plan. The court was therefore asked to utilise 'cross-class cram-down' and sanction the plan over the objections of the shareholder class.
The court was unwilling to sanction the plan on two separate grounds.
- The court was not convinced that the members of the dissenting class (the shareholders) would be 'no worse off' under the plan than they would be in the event of the relevant alternative. (The legislation in s.901G of the Companies Act 2006 stipulates that this is a threshold condition to the use of cross-class cram-down.)
- Even if the shareholders would have been 'no worse off' under the plan (meaning that the threshold conditions were satisfied), the court determined that it would not have exercised its discretion to sanction the plan.
During the hearing the court had tested the company on whether its asserted financial difficulties were as urgent as the company suggested, and numerous alternatives to the restructuring plan were discussed. The court took the view that the relevant alternative was continued trading for a further year. Furthermore, it concluded that:
'The fact there is a realistic prospect... that the Company will be able to discharge its obligations to the bondholders, leaving assets with at least potential for exploitation, is enough to refute the contention that the shareholders will be no better off under the relevant alternative than under the Plan.' (emphasis added, paragraph 125 of the judgment)
The court further declined to grant permission to appeal, holding that the decision had turned on the factual evidence provided in respect of the relevant alternative, rather than a question of legal interpretation.
We have seen in previous restructuring plans (from Deep Ocean to Smile Telecom and Virgin Active) that the new cross-class cram-down process scan be a powerful and effective tool for compromising creditors.
However, Hurricane was the first plan to try to use those powers to effect a debt-for-equity swap without shareholder consent, relying on the disapplication of various corporate law provisions such as pre-emption and allotment in the context of a restructuring plan. The decision may be seen as something of a setback for using the plan in this way, but it is important not to read too much into a case that very much turned on its facts.
One possible takeaway from the judgment is that companies with a longer runway, as opposed to the cliff edge of (for example) an imminent liquidity need or maturity, may face a heavier burden in demonstrating that a plan should be sanctioned – at least where that plan contemplates the permanent compromise of dissenters’ rights.
However, we know from previous judgments that the court is also not impressed by companies that leave it to the last minute to commence a process and therefore put a 'gun to the court’s head'. It therefore remains important for any company facing financial difficulties to consider its options early, and to plan a process and timetable that takes into account these considerations.
'The fact there is a realistic prospect…. that the Company will be able to discharge its obligations to the bondholders, leaving assets with at least potential for exploitation, is enough to refute the contention that the shareholders will be no better off under the relevant alternative than under the Plan.'