Collateral Gains? High Court Rules Indirect Economic Benefits Too Remote in Petrofac Plan

Introduction

On 20 May 2025, Mr Justice Marcus Smith handed down his eagerly-awaited judgment sanctioning the two inter-conditional restructuring plans (the Plans) proposed by members of the Petrofac Group. The judgment raises issues described as “going to the heart of the Part 26A regime” and is significant as the first case to consider the application of the Court of Appeal’s ruling in Thames Water.

The judgment addresses three particularly interesting points:

1. What the appropriate “relevant alternative" to a restructuring plan is (in this case, a liquidation as proposed by the company or an alternative settlement offer proposed by certain challenging creditors).
2. Whether and what indirect benefits can be taken into account when considering the “no worse off” test as a condition to cram-down of dissenting creditor classes and/or for general fairness. 
3. Whether the Plans should be sanctioned on fairness grounds in view of the disparity in treatment of the different creditor classes. 

We consider each of these points in more detail below. 

Background

More detail on the background to the Plans and the issues raised earlier in the process are set out in our post on the convening judgment here. In summary, the Plans aim to address the Petrofac group’s financial liabilities as well as certain non-financial liabilities stemming from a 2017 Serious Fraud Office investigation and a loss-making clean fuels venture with Saipem and Samsung (the JV Partners). The group will also receive an injection of new money from certain of its existing secured creditors (US$218 million) as well as a group of new investors (US$226 million). 

The outcome of the creditor meetings in respect of the Plans was that that nine of the twelve creditor classes across the two Plans voted in favour of the Plans (with substantial representation and significant majorities in each case). The three dissenting classes consisted of the JV Partners and Thai Oil, the latter being the ultimate customer of the ill-fated clean fuels project. The judge therefore needed to consider (a) whether the requirements for cross-class cram-down under Part 26A were satisfied as well as (b) whether to exercise his discretion to sanction the Plans.

Relevant Alternative and alternative plans

There are two conditions to cross class cram down.  In this case, it was common ground that Condition B was met, which requires at least one class with a genuine economic interest to assent to the restructuring plan.  However, the court also needed to be satisfied that the creditors were no worse off under the Plans than the relevant alternative (Condition A). The companies submitted that a disorderly liquidation of the group would be the alternative to the Plans. The JV Partners sought to challenge this and argued that the relevant alternative was a different restructuring under which they stood to receive a greater return.

The basis for this was an offer made by the JV Partners on 4 April 2025 to withdraw their opposition to the Plans in exchange for additional benefits, namely a cash payment of US$25 million by 31 December 2027 and additional warrants estimated to have a combined value of US$61.1 to US$69.5 million. 

Whilst acknowledging the JV Partners’ proposal to be “on any view, a generous offer”, the judge did not agree that it would be supported by the secured creditors and new money providers – “two important and overlapping groups”. The group’s CFO had given evidence (which the judge viewed as compelling) that any additional leakage to the unsecured creditors was likely to be viewed as unacceptable to those providing new money. In particular, some of the new money providers had no pre-existing exposure to the Petrofac group and the commercial terms on which they were willing to lend had therefore been particularly carefully negotiated. Without the new money, the restructuring would not be possible (and – importantly – the JV Partners were not proposing to provide new money themselves). 

As seen in Thames Water (and, before that, Sino Ocean), it is an uphill battle for challenging creditors to make the case for an “alternative plan” as the relevant alternative. The evidence of the company as to the creditors’/new money providers’ willingness to accept an alternative plan is difficult for challenging parties to contest. In this case, the fact that some of the new money providers had no prior exposure to the group and that the challenging JV Parties were not themselves offering new money led the judge to conclude that liquidation was indeed the relevant alternative.

The “No Worse Off” Requirement

Having determined the correct relevant alternative, the judge then considered the JV Partners’ argument that they would nevertheless be worse off under the Plans than in a liquidation. It was common ground that the direct financial benefits the JV Partners would receive under the Plans exceeded what they would recover in liquidation.  However, the JV Partners contended that the indirect economic benefit derived in liquidation from the elimination of a competitor also had to be taken into account.

The judge expressly did not rely on any expert evidence regarding the impact of Petrofac’s liquidation on the JV Partners, although he was prepared to accept prima facie that the elimination of a competitor would benefit the JV Partners, and further that they derived this benefit in their capacity as creditors of Petrofac. However, in his view, the key question was whether, as a matter of law he was able to take into account the indirect economic benefit arising from loss of a competitor.

The answer to this question in the judge’s view was no, at least not for the purposes of the jurisdictional gateway of the no worse off test in s. 901G(3). Previous case law such as Virgin Active and Smile Telecoms had established that the “no worse off” test should not be narrowly construed and could go beyond simply comparing creditors’ returns on their claims under a plan and in the relevant alternative. However, the judge considered that the ambit of this inquiry was not unlimited: the competitive benefits for the JV Partners were both (i) too indirect in terms of consequence; and (ii) difficult to quantify. The benefits here were “for want of a better term – “too remote””. The judge drew on the language used by Mr Justice Adam Johnson in Great Annual Savings Co Ltd, although he acknowledged that the facts of this case were very different. 

The judgment leaves open the question of what indirect factors could be taken into account in the “no worse off” test and does not give much guidance as to where the line will be drawn on remoteness. 

Discretion

Finally, the JV Partners argued that the court should not exercise its discretion to sanction to the Plans. This argument centred around (i) the levels of fees, in particular the work fee; and (ii) whether the Plans were fair, in particular in the way the indirect benefits (liquidation of a competitor) were factored (or rather, not factored) into the Plans and the allocation of the restructuring benefits.

In relation to fees, the judge rejected both the argument that work fees (worth up to USD29m in equity) related to work that had been done prior to any agreement being reached for such fees or that they were too high. He recognised that the ad hoc group had spent significant time and effort formulating the restructuring and that they both deserved and expected to be compensated for this. Secondly, he accepted that the work fee appeared higher because the ad hoc group had agreed to take the fee in the form of equity rather than cash, which carried the risk of potentially lower returns should the Plans fail.

Following the Court of Appeal’s decision in Thames Water, the judge noted that the fact of the dissenting creditors being almost “out of the money” in the liquidation alternative did not mean that their interests should be discounted entirely. However, the judge was not interested in an examination of how the plan companies had approached the negotiation of the Plans, focusing instead on whether the outcome of the Plan is fair.  This is consistent with the comments in Thames Water making clear that the court’s role is forward-looking (although we note in passing that under the draft revised practice statement the court would require disclosure on the level of information provided to, and engagement with, all creditor classes in advance of launching a plan). 

Taking instead the question of whether the outcome of the Plans was fair, the judge noted that sharing the value preserved by the Plans (or, as the judge framed it, the shortfall between the creditors’ nominal exposure and the preserved value) on a pari passu basis was “prima facie a fair allocation”. However, he went on to separate the affected creditors into (i) those only providing new money; (ii) those who are both secured creditors and providing new money; (iii) secured creditors who are not providing new money; and (iv) unsecured creditors. When so separated, the judge was satisfied that the Plans were justified in allocating a greater share of the preserved value to those providing new money and that the shares of the secured creditors versus the unsecured creditors were not disproportionate.

Finally, the judge considered the impact of the indirect economic benefit to the JV Partners of Petrofac’s liquidation on the fairness of the Plans. Despite having dismissed this factor as too remote to take into account for the jurisdictional question of the “no worse off” test, the judge did consider it potentially relevant to the discretionary question of the Plans’ fairness. Although he accepted that the indirect economic benefit was “a real one”, the judge noted that it was necessary for all unsecured creditors to give up claims for the Plans to work and there was no reason to take special account of the indirect economic benefit here. 

The judgment is rather brief on these final points, again leaving open the possibility for further consideration of these issues at appeal or in future cases. 

Conclusion

The indirect economic benefit issue gave rise to interesting points of law in relation to both the “no worse off” and fairness questions. While the specific facts of the case (the challenging creditors being direct competitors of the plan company) are a little unusual, the existence of indirect economic benefits arising in the relevant alternative is not uncommon and therefore the conclusions set out in this judgment are likely to have relevance in future cases. 

The approach to the allocation of restructuring benefits is also a hot topic, and it remains to be seen whether further guidance emerges as to how this assessment is to be approached.

The challenging creditors are appealing the sanction order on an expedited basis, meaning that we are likely to have more insight on these points soon. Watch this space!