Petrofac restructuring plans move forwards: notice and fees in the spotlight

On 8 April 2025, Mr Justice Marcus Smith delivered judgment granting Petrofac Limited and Petrofac International (UAE) LLC (the Plan Companies) permission to convene creditor meetings in respect of two inter-conditional restructuring Plans (the Plans). The fulsome judgment, following hearings on 28 February and 20 March, contains a number of interesting points:

• Compromise of liabilities relating to an SFO investigation: the Plans involve the compromise of certain claims against Petrofac by current and former shareholders, directors and insurers, relating to conduct which resulted in an SFO investigation.

• Notice: there was a real risk that certain unrepresented shareholders with potential claims against the  companies arising from the matters which resulted in the SFO investigation had not received sufficient notice of the Plans. To address this concern, the court directed the appointment of an independent retail investor advocate and made a costs order in favour of represented contingent creditors with similar claims. 
• Fees: this was the only material point considered in relation to class composition. The judge found that the work fee (an aggregate c.US$7 million in cash, convertible to equity which may ultimately be worth up to US$29 million) and backstop fees (3.75% of the new notes and equity for initial backstop lenders, plus an additional 3.75% of new notes and equity as a backstop premium for all new money providers) available to the ad hoc group were not sufficiently material to fracture the class of senior secure funded creditors. 
• Other points of note include a consideration of the applicability of the Human Rights Act 1998, the question of whether a compromise in all classes is necessary, and some practicalities arising from the sheer complexity of the proposed restructuring.

We explore these points in more detail below.

Background

The Plan Companies are members of the Petrofac group, an international service provider in the energy sector listed on the London Stock Exchange.

The group’s financial difficulties stem from a Serious Fraud Office (SFO) investigation which ultimately resulted in Petrofac Limited pleading guilty to bribery-related offences and paying a £70 million fine, plus £7 million costs (the SFO Investigation). As a result, Petrofac has subsequently struggled to win contracts in key markets such as Iraq, Saudi Arabia and the UAE. Although the group has attempted to pivot to riskier and more complex work elsewhere, some of these contracts have created further losses and liabilities (estimated in the billions of dollars). A 2021 restructuring was not able to address fully the group’s financial difficulties. 

The Plans propose to compromise, in summary: 

• four financing agreements totalling over US$900 million and sharing a common guarantee and security package; 
• claims of shareholders, directors and D&O insurers relating to the SFO Investigation; and 
• claims connected to the loss-making contracts entered into by the group.

Various other liabilities are either subject to compromise outside the Plans or are left uncompromised. New money in the form of US$218.75 million of new equity and US$131.25 million of new senior secured notes is to be injected, while two existing secured noteholders are to provide US$80 million cash collateral to fund a cash-backed guarantee facility.

The terms of the Plans have clearly been the subject of intense negotiations, led by Petrofac and an ad-hoc group of secured creditors (the AHG). AHG members are eligible for a work fee of an aggregate US$7,092,750 in cash, convertible on completion to new ordinary shares which are ultimately estimated to have a value of between US$23 million and US$29 million. Those existing creditors providing the initial backstopped notes are entitled to a backstop fee of 3.75% of the new notes, structured as an OID, plus 3.75% of new equity. All senior secured funded creditors also had the right to accede as additional backstop creditors to receive an additional backstop premium of 3.75% of the new notes, structured as an OID, plus 3.75% of new equity. The judge noted that the aggregate value of the backstop-related fees and premiums was approximately US$8 million new notes and US$55 million new equity. A cash early bird consent fee of 0.25% will be payable on completion. 

Compromise of SFO-related liabilities

As noted above, the Plans propose a compromise of certain actual and contingent liabilities relating to the SFO Investigation (although not the penalties payable for the bribery offences). The liabilities proposed to be compromised are, in summary:

• liabilities arising from claims by current and former shareholders against the group’s listed parent, Petrofac Limited, for failing to disclose the issues to which the SFO Investigation related. This includes some claims already initiated by shareholders who have engaged legal representatives, but also prospective claims of other shareholders without any such representation. The judge noted that the potential value of these claims is difficult to quantify but could exceed £500 million; 
• liabilities to current and former directors and employees in respect of their future legal costs associated with the SFO Investigation (£10.3 million in such costs having already been paid); and
• potential restitutionary liabilities to the group’s former D&O insurers in respect of payments made under the relevant D&O policies, which the former D&O insurers are seeking to avoid.

Each of these categories of liability brings different challenges: all are contingent and uncertain liabilities, but the creditors range from clearly identified and sophisticated insurers to potentially unidentified retail shareholders. The potentially unidentified and unrepresented shareholder group poses particular problems in relation to the requirement to give notice to creditors (see further below). Despite the practical challenges posed by these liabilities, the judge was content to convene the creditors’ meetings. 

Notice

The road to the convening of the plan meetings appears to have been a somewhat bumpy one, with some changes to the proposals necessitating a supplementary practice statement letter and other, largely undisclosed, issues resulting in a second convening hearing. The outcome of all this was that all creditors eventually had a rather lengthy notice period of 66 days from delivery of the original practice statement letter to the first convening hearing. 

However, the judge was concerned about the notice provided to those contingent creditors in respect of claims arising from the SFO Investigation who were not represented by legal advisers at the time the Plans were formulated and proposed. There are obvious practical limits to a company’s ability to notify such creditors. As a result, the judge ultimately convened the plan meetings with two measures which he considered reduced the potential harm to the unrepresented contingent creditors from a lack of notice. These were:

• the appointment of an independent retail investor advocate (Jonathan Yorke), who produced a report and provided a witness statement covering, amongst other things, notice; and
• in what we understand to be a first for restructuring plans, prospective costs orders in favour of the represented shareholder creditors. The judge expressly stated was intended to address the potential adverse effects of a lack of notice to the unrepresented shareholder creditors through potential advocacy of points similar to those which could have been taken by the unrepresented parties. 

This pragmatic approach enabled the convening of the creditor meetings while making some effort to protect any potentially unnotified creditors. The appointment of the investor advocate draws on the practice seen in consumer finance restructurings such as Amigo. 

Fees 

Unusually, two parties with substantial contractual claims proposed to be compromised by the Plans sought to challenge the composition of the class of senior secure funded creditors – despite not being within it themselves. Although the court was unwilling to accept Petrofac’s argument that this was none of their business, in this regard he noted that “the absence of objection from the Proposed Class is a significant matter”.

This challenge was, among other things, raised on the basis that the level of fees on offer to the AHG were such as to fracture the class. Here, the judge followed previous scheme and restructuring plan cases (expressly citing Codere) in noting the importance of looking at the cumulative impact of fees as compared to the benefit provided by the restructuring as a whole.

Under the Plans the AHG-specific fees (a work fee paid in the form of equity and backstop fees in respect of the new debt and equity investments) were said to represent 6.9% of the overall recoveries of the AHG. This was not found to be sufficiently material to fracture the class; in the context of the surplus provided to the senior secured funded class of creditors by the restructuring, there “is more to unite than to divide” the members of the class. The judge was not moved by the fact that the fees were said to be particularly high and was sympathetic to the argument that these fees represented real work and/or risk on the part of the AHG. 

Other points

Human Rights Act

The court briefly considered whether there was an issue as to compliance with the Human Rights Act 1998 and/or the European Convention of Human Rights arising from the compromise of the contractual claims relating to the loss-making contracts and/or the shareholder claims described in more detail above. He held that there was no such issue, thanks to the Court oversight built into the Part 26A process (and in particular the sanction hearing). 

Compromise in all classes

The judge also briefly raised the question of “whether the requisite element of “give and take” must subsist as between each class of Plan creditor”, which was previously considered in Aggregate. There, Richards J took the view that “the proposal must constitute a “compromise or arrangement” for every class of creditor”. This is clearly an interesting and relevant point in context of Petrofac’s Plans, where some creditors (in particular the counterparties to the loss-making contracts) stand to receive very little as proposed. However, the point was held over for sanction, so we will have to wait a little longer for a decision on the issue. 

Conclusion

The sheer scale and complexity of Petrofac’s restructuring required the judge to consider a variety of interesting practical and legal issues. The judgment largely aligns with previous cases on key points of restructuring plan law such as notice and class composition, albeit adding usefully to the practical guidance on these points. The court laid down some tantalising markers for the sanction judge, whose judgment we await with interest.