Waldorf: the trilogy of Court of Appeal cases applied – restructuring plan not sanctioned

In a significant further application of the Court of Appeal’s reasoning in Adler, Thames Water and Petrofac, the High Court declined to sanction a cross-class cram down restructuring plan proposed by Waldorf Production UK Plc. 

Hildyard J’s detailed (76 pages) judgment clarifies that plan companies must demonstrate that the plan is fair in order for the court to exercise its discretion when sanctioning the plan, even where it meets all statutory conditions to jurisdiction. Here, there had been no negotiations with the unsecured creditors which, while not a pre-condition to jurisdiction, the Court of Appeal in Petrofac certainly expected that there would be. Importantly, there had been no or no sufficient attempt to consider the fair allocation to all stakeholders, not just the secured creditors, of the benefits expected to be generated by the restructuring. Recognising the shift in treatment of out of the money creditors following Adler, Thames Water and Petrofac, a 5% recovery for unsecured creditors was found “essentially arbitrary”, and the failure to meaningfully engage with unsecured plan creditors proved fatal to the plan’s prospects. 

Background

Waldorf Production UK Plc (Waldorf) is an oil and gas producer with operations primarily in the North Sea. Facing mounting problems, including the Energy Profits Levy (EPL) introduced by the UK Government in 2022 in response to turbulent global energy prices, exacerbated by a further drop in oil prices in 2024, a heavy debt burden and a large dividend payment to shareholders having drained cash, Waldorf proposed a restructuring plan under Part 26A of the Companies Act 2006. 

There were only three parties to the plan: 

1. The secured bondholders (with an ad hoc group of bondholders driving the deal and agreeing to the plan);
2. HMRC for an amount of US$75.4 million; and 
3. Capricorn Energy Plc and its subsidiary, Capricorn Energy UK Limited (together, Capricorn). Capricorn’s claims arose primarily from a prior sale transaction: Waldorf had acquired North Sea oil and gas assets from Capricorn in 2021 and under the SPA deferred consideration (totalling US$29.5 million) became due to Capricorn. 

The convening hearing and the plan 

The court convened two creditor meetings: (1) the bondholders as one class and (2) HMRC and Capricorn together, as unsecured creditors (the Unsecured Creditors).

The Unsecured Creditors forcefully objected, both to the substance of their treatment and the manner in which the plan had been constructed—without meaningful engagement or negotiation.

In short, the plan proposed that the maturity of the bonds would be extended by two years (with certain other amendments made to existing terms including minimum liquidity covenants and a mandatory early redemption mechanic), while HMRC and Capricorn were to recover 5% of their claims in cash (plus a contingent “upside” mechanism seen as illusory by dissenters). 

The relevant alternative and cross class cram down Condition A

Waldorf argued that the relevant alternative (i.e. the most likely outcome if the plan was not sanctioned), was a formal insolvency in which the Unsecured Creditors would recover nothing. On this basis, the 5% offer meant they were “no worse off” thereby satisfying Condition A for cross class cram down.

The Unsecured Creditors together argued that this was not so. They contended that one of a number of different negotiated restructurings would in truth be the relevant alternative, it being in no-one’s interest to let the company fall into an insolvency, including the secured bondholders who were forecast to receive a substantial uplift if a solvent sale of the company took place. In this regard, the Unsecured Creditors noted that “the idea that these sophisticated commercial entities will throw a very significant upside away in a fit of pique, refuse to talk to HMRC and [Capricorn] and petition for [Waldorf’s] winding up is fanciful”. What makes the Waldorf case unusual is that the bondholders, as secured creditors were not in a position to simply enforce their security (due the complex regulated space that the company operates in).

The Court (with a heavy heart) ultimately sided with Waldorf, holding that the relevant alternative for the purposes of the statutory test was indeed a formal insolvency process—such as administration or liquidation—because:

• the alternative restructuring proposals from the Unsecured Creditors (ultimately being a cash payment of 15% of the value of the Unsecured Creditors’ claims with all remaining terms of the plan remaining, together with a payment of costs incurred), while potentially “realistic,” lacked sufficient definition and certainty to amount to a true alternative at the date of sanction;
• the bondholders had emphatically rejected the Unsecured Creditors’ proposals, and the Court had no grounds to disbelieve their evidence that they would not accept such alternatives.

The court held that the concept of the “relevant alternative” is a reference point for matters central to the statutory architecture, including the identification of proper classes, the assessment of whether a creditor is “no worse off”, as well as the assessment whether a plan is sufficiently consistent with existing entitlements. Therefore, “what is put forward as a relevant alternative must be sufficiently clear, certain and defined for the purpose of satisfying its function in the statutory scheme. An inchoate alternative, even though it may be likely to be achieved, has not the characteristics required.”

Condition A (the “no worse off” requirement) was therefore satisfied for jurisdiction purposes in order to exercise the cross-class cram down power. 

Cross class cram down Condition B

This requires that the plan must be agreed by at least 75% in value of a class of creditors “who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.” This was not at issue here as the (secured) bondholder class had unanimously approved the plan at the meeting. 

Discretion

It is of course not sufficient that statutory conditions A and B are satisfied. In all cases – and especially so where cross class cram down is engaged – the court must be satisfied that the plan is one that it should, in its discretion, approve. This requires the court to consider the fairness of the proposed plan, and this is particularly so where there is an allocation of value in connection with the restructuring. 

It is in this space that recent guidance by the Court of Appeal in its “trilogy of cases”: Adler, Thames Water and Petrofac, has most made its mark. All three cases are relevant in scoping the court’s discretion – and how this fits in with the relevant alternative. 

In Waldorf the court has been clear: a comparison with the relevant alternative should not be the predominant comparator in assessing fairness in the context of the plan.

What the company needs to demonstrate to the court is whether what the plan would achieve is a fair and reasonable allocation of the benefits of the restructuring having regard to the amounts contributed by each creditor class, including the class proposed to be crammed down. This is a separate (and different) exercise than simply satisfying Condition A – the no worse off test – and involves a broader, more complex analysis based on the facts of each case.  

The Court of Appeal’s judgment in Petrofac also makes clear that what constitutes a fair allocation is likely informed by the pattern and results of previous negotiations between the plan company and the relevant class, both in “setting upper limits to the expectations of the dissenting class proposed to crammed down, and in providing a useful insight into whether the dissenting class has negotiated fairly and reasonably, or whether it has in truth been seeking to extract too much in term of value from its right of veto”. Absent such negotiation, the plan company has no evidence as to whether challenging creditors were acting unreasonably in demanding a greater share of the benefits. 

The Court noted that the present case was slightly unusual in that the benefits generated by the restructuring are uncharacteristically easy to quantify and articulate; here, the delta between the negative valuation of Waldorf prior to the Plan and the positive valuation following sanction equated to the value of the liabilities owed to the Unsecured Creditors and extinguished under the plan: “In other words, all the benefits of the Restructuring are generated by the extinguishment of the debts owed to HMRC and Capricorn. The Bondholders are not contributing anything, save for the extension of the maturity date.”

Here, the court held that there had been no or no sufficient attempt to consider the fair allocation to all stakeholders, not just the secured creditors, of the benefits expected to be generated by the restructuring. It could therefore not sanction the plan. 

How does a company demonstrate it has considered the fair allocation of a restructuring? This is where case law is running a little thin. Here, the evidence showed that the company had failed to negotiate with the Unsecured Creditors who, however, in turn had repeatedly signalled a willingness to discuss a fair compromise—offers to accept 15-20% on their claims were tabled and ignored. The court held that the plan had been  constructed “on the false premise” that out-of-the-money creditors can be handed an arbitrary amount—without considering what is commercially reasonable.

While the court held that there is no “statutory precondition of negotiation” (and that Petrofac could not be interpreted as such) – the fact, pattern and result of negotiations with dissenting creditors being an evidential issue rather than one of principle defining the statutory power - it would be hard for a company to show the fairness of the allocation of restructuring benefits where there have been no negotiations and no explanation is offered as to why not. Indeed, in emphasising the nature of cross class cram down, the court reaffirmed that the statutory power was intended to “provide recourse against a class which has turned against reasonable engagement and/or agreement”.

While the inability to demonstrate the fair allocation of the restructuring benefit was the sole determinative factor, the court did point out some further factors against sanction: 

• the consequence of the “enormous” interim dividend (US$76 million) paid in October 2022 on the basis of obviously deficient management accounts; 
• the deliberate decision not to pay its EPL liability, to trade on regardless, without approaching HMRC for further time to pay arrangements whilst formulating a restructuring plan premised on the cram down of HMRC – such conduct being the “antithesis of the fair dealing to be expected of a company seeking to enlist the assistance of the Court in cramming down a dissenting creditor as being a just and equitable solution”; and 
• the costs incurred by the company and the bondholders already exceeded the difference between one of the alternative proposals put forward by the Unsecured Creditors and the 5% offered. 

So what are our key take aways?

1. What is the future of presenting a “different deal” as relevant alternative? A different deal has been the arguments of challengers recently in Thames Water and Petrofac. Again, such arguments failed in Waldorf. While it might be argued that the “different restructuring” proposed here lacked in specificity, this certainly wasn’t the case in others (e.g. Thames). Waldorf therefore further emphasises that arguments based on “a different deal” are a real uphill battle and that it may be more fruitful for challengers to focus their arguments on fairness (whether there should be a better deal) rather than jurisdiction (whether there would be).
2. Virgin Active is truly dead. An early restructuring plan that had suggested that little to no weight should be given to creditors who are out of the money is overruled. This had been made clear in the Court of Appeal authorities of Thames Water and Petrofac – and trailed in High court cases such as Ambatovy. 
3. Discretion is real – and the burden of establishing that the plan proposed is fair rests squarely on the plan company, whose conduct and transparency towards all creditors ahead of (and during) a restructuring is subject to scrutiny by the court and may weigh on discretion.
4. Long live negotiations. While there is no “statutory precondition of negotiation”, the burden to show that the plan is fair is more difficult to discharge where there have been no negotiations with creditors and no explanation as to why not. 
5. Theoretical underpin of cross class cram down. The court is mindful of the nature of the cross-class cram down power. It is there to provide recourse for a plan company against a class of creditors which has turned its face against reasonable engagement and/or agreement. The statutory power is not therefore intended to be invoked “without prior attempt at bargaining” and then only where such bargaining has proven futile. 

What’s next for Waldorf?

The plan company requested a direct “leapfrog” appeal to the Supreme Court – the outcome of which is not yet known. In this regard, the plan company in Petrofac has also filed a notice of appeal with the Supreme Court which is pending. In the meantime maybe the company will resume negotiations with the Unsecured Creditors such that an appeal may not ultimately go ahead.