Restructuring Meets Litigation: Insights from the Chaptre Finance Decision

In a recent decision, the English High Court has continued the trend of treating court-based restructurings as civil litigation.

As we discussed in our previous blog on the continued development of contentious restructurings as litigation, (see here), it is now beyond doubt that court-based restructuring processes should be approached from the outset as pieces of litigation.

Successfully navigating this landscape requires parties to carefully apply the ongoing guidance from the courts to de-risk their overall strategy from day one, whether proposing, supporting or challenging a restructuring.

In the Chaptre Finance decision, the court has brought together a number of the threads from recent cases treating restructuring proceedings as litigation. In particular, the court in this case considered the importance of (i) ensuring proper case management of proceedings, (ii) compliance with Part 35 of the Civil Procedure Rules (“CPR”) (which governs the use of expert evidence), and (iii) the cross examination of expert witnesses.

The case is the latest in a growing number of cases providing guidance on these important issues and serves as a useful reminder of the need for all parties in a court-based restructuring to engage fully with the intricacies – and potential pitfalls – of the court process.

Chaptre Finance

The Chaptre Finance restructuring plan was the second plan proposed by the company in two years and related to a Teesside biomass power plant. The main purpose of the plan was to inject up to £85m of new super senior financing in order to ensure the continued operations of the power plant. In October 2024, the court convened meetings of four classes of creditors. 

The Opposing Creditors 

The requisite majorities of three out of Chaptre Finance’s four classes of creditors voted in favour of the plan. The Senior Creditors (somewhat a misnomer as this was the lowest ranking class), however, did not. Certain of them (the “Opposing Creditors”) opposed the plan largely on the ground that they considered that they would be ‘worse off’ under the plan than in a formal insolvency process (the “relevant alternative”). 

Despite their objections, the court sanctioned the restructuring plan. The court exercised its discretion to do so because it was satisfied on the evidence that Chaptre Finance would enter an insolvency process absent the plan and that the Opposing Creditors would be no ‘worse off’ under the plan than in the relevant alternative (where they would be wholly out of the money). The court noted that the conclusion that the Opposing Creditors would be out of the money in the relevant alternative was “highly material” to the exercise of its discretion to cram down, following Virgin Active and Adler (see our blogs here and here) making clear that the views of out of the money creditors are to be given little or no weight.

While there remains an active discussion in the market on whether this is the right yardstick to apply to discretion, in this blog we focus on the court’s observations in respect of the parties’ conduct and evidence in the proceedings.

Proper case management of proceedings

The court explained that the proper case management of restructuring plans (like other court proceedings) requires the parties to identify points of dispute as early as possible. 

The court took issue with the fact that, although the Opposing Creditors had been raising objections to the plan in correspondence since September 2024, they only properly articulated their objections four days before the sanction hearing by filing a skeleton argument and a letter from a financial advisory firm. 

In comments that will not go unnoted, the court indicated that it may have been sympathetic to adjourning the sanction hearing to accommodate the Opposing Creditors’ challenge, but this was not applied for.

The parallels identified by the court between court-based restructuring proceedings and adversarial civil litigation are notable and were recently addressed in detail in Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch), a case in which security for costs was granted in respect of a challenge to a restructuring plan for the first time. 

Compliance with Part 35 CPR

In a notable development, the court noted that there is no reason why valuation and outcome reports for restructuring plans should not be required to comply with Part 35 CPR. It explained that these requirements (which, amongst other things, explain the expert’s overriding duty to the court) place experts under stringent obligations and require them to ensure that their reports are a genuine product of their independent expertise. This builds on the court’s previous guidance in the Smile Telecoms decision that opinions from foreign law experts on recognition of a plan in other jurisdictions need to comply with Part 35 CPR (see our blog on this here). 

In this case, the court took particular issue with the fact that:

(1) the original reports relied upon by Chaptre Finance did not identify their authors (and the expertise and independence of those authors) and disclaimed any duty to the court (through an express disclaimer stating that the experts owed no duties to any stakeholder of Chaptre Finance or the court). This was “on its face a disavowal of the overriding duty under Part 35.3 of the CPR” (the expert’s overriding duty to the court), such that the Judge “could not consider that the court could properly have accepted evidence from experts who had expressly disavowed any duty to the court”.

(2) the Opposing Creditors sent a letter from a financial advisory firm to Chaptre Finance that also did not comply with Part 35 CPR. The court explained that the Opposing Creditors were essentially seeking to bolster expressions of opinion as if they were expert evidence. The Opposing Creditors argued at the sanctions hearing that the court should adopt a flexible approach to restructuring plan proceedings, but the court ultimately held that where either the plan company or objecting creditors seek to rely on expert opinions, the expert reports should comply with Part 35 CPR. 

Chaptre Finance filed amended Part 35 CPR compliant reports before the sanction hearing, and the court decided that it had no choice but to go with the only expert evidence that was Part 35 CPR compliant. 

Cross examination of expert witnesses

The court placed significant weight on the decision by the Opposing Creditors not to cross-examine Chaptre Finance’s expert witness. 

The general rule in adversarial litigation is that a party is required to cross-examine the evidence of an opposing expert witness where it is argued that the expert’s opinion should not be accepted. In Chaptre Finance, the court explained that this was a matter of fairness, enables the judge to make a proper assessment of all the evidence and gives the expert witness the opportunity to explain or clarify their expert evidence. The Judge also explained that this rule applied “with real force” in restructuring cases, where the expert evidence is often complex and technical. As Snowden J explained in Smile Telecoms, although the Judge can ask questions and probe areas of concern about the evidence, they cannot be expected to engage in a sort of vicarious challenge to the evidence without help from an expert or the benefit of cross-examination. 

In this case, the Opposing Creditors chose not to cross-examine Chaptre Finance’s experts. Accordingly, on the key question of whether the Senior Creditors would be ‘worse off’ under the plan, the court held that it could not reject the plan company’s expert evidence because it would not be fair to do so without cross-examination. The Court also explained that there have now been numerous contested restructuring plans where cross-examination of experts has taken place, and indicated that that should have taken place here. 

Challenging is expensive but cannot be shortcut

In another indication that the court expects challengers to engage fully with the court process, the Opposing Creditors submitted that they had budgetary constraints which had shaped the limited scope and timing of their challenge to the plan. The court gave little weight to this, finding that this did not justify a departure from the usual requirements concerning the early identification of contentious issues, the service of properly compliant evidence or the cross-examination of witnesses. The judge noted the court’s power to award a challenging party its costs, including pre-emptive security for costs. There is sure to be more to come on this in future cases.

Conclusion

The Chaptre Finance decision brings together useful guidance on a number of topics seen in recent contested restructuring plans and schemes – and reiterates the court’s willingness to accommodate challenges where these are appropriately framed and pursued in line with the usual rules and practices of civil litigation.

All parties should adopt a litigation mindset from the outset and look to leverage the civil litigation process to their advantage.

The Chaptre Finance decision can be accessed here.