On 28 June 2021, the High Court delivered judgment refusing to sanction a restructuring plan put forward by the Board of Hurricane Energy Plc [“Hurricane”], and vehemently supported by an ad hoc committee of Hurricane’s bondholders [“the Hurricane Plan”] [2021] EWHC 1759 (Ch). Whilst the Plan drew criticism and concern from several hundred of Hurricane’s private investors, only one institutional investor, Crystal Amber Fund Limited [“Crystal Amber”], was ready, willing and able to invest the time and money to formally oppose the Plan, with full legal and expert representation.
Restructuring Plans pursuant to section 26A of the Companies Act 2006
The Corporate Insolvency and Governance Bill 2020 received royal assent on 25 June 2020, and was passed into law as the Corporate Insolvency and Governance Act 2020 [“the Act”]. Alongside several other key updates, the Act introduced into the Companies Act 2006 (Part 26A) a new “cross-class cram down” arrangement and reconstruction process as an additional tool to rescue financially distressed companies [“Part 26A Plan”].
This new restructuring tool is available to companies which have, or are likely to encounter, financial difficulties that are, or are likely to, affect their ability to carry on trading as a going concern.
Broadly speaking, a Part 26A Plan is similar in form and process to the existing scheme of arrangement procedure under Part 26 of the Companies Act 2006 [“Scheme”]. Case law in relation to the Scheme process is well established and will be applied to determining Part 26A Plans. However, there is one major distinction between a Part 26A Plan and a Scheme; while a Scheme requires approval by at least 50% in number constituting 75% in value of each relevant class of creditors or members, as the case may be, present and voting either in person or by proxy in favour of the Scheme for it to proceed to sanction by the Court, a Part 26A Plan allows the court discretion to sanction a plan where a number representing 75% in value of the creditors or members, as the case may be, of each relevant class present and voting either in person or by proxy in favour of a plan, even where there is a dissenting class (or classes). The dissenting class is “crammed down”, hence the newly coined phrase.
The dissenting class can be “crammed down” by Court sanction in circumstances where (a) no members of the dissenting class would be any worse off under the “relevant alternative” to the plan; and (b) at least one of the classes that has voted in favour of the Plan would receive payment, or have a genuine economic interest in the company if the relevant alternative was implemented. The “relevant alternative” for these purposes will be whatever the Court considers most likely to occur if the plan is not sanctioned by the Court (and given the nature of plans, this may well be said to be an administration or liquidation).
The Hurricane Plan
Under pressure from twitchy Bondholders, the Hurricane Board decided earlier this year that Hurricane was not likely to be able to repay its $230m of bond debt due in July 2022 – despite having more than a year until maturity and sufficient cash to service the interest in the meantime. The Board determined that the best way to resolve this problem was to hand over control of the equity to the Bondholders, in return for an extension to the maturity date of the bonds, plus a modest reduction in the debt (which reduction was then countered by increased and additional interest). Hurricane would then continue trading for up to three years, with all free cash (forecast to be around $170,000,000) being paid to the Bondholders. It was said that the “relevant alternatives” to the Hurricane Plan were either an immediate and uncontrolled liquidation, or a “controlled wind down”. In either case, the Board determined shareholders would be “no worse off” than they would be under the Hurricane Plan. Accordingly, the Board applied under Part 26A, claiming the shareholders did not need to be consulted nor asked for approval.
Opposition to the Hurricane Plan
Crystal Amber disagreed. It instructed Rosenblatt Limited, Leading and Junior Counsel from Erskine Chambers, financial and technical experts. At a 3-day sanction hearing before Mr Justice Zacaroli via Microsoft Teams, Crystal Amber opposed the Hurricane Plan on the basis that it was premature, manifestly unfair and – crucially – that the Company had identified the wrong “relevant alternatives” if the restructuring plan was not sanctioned, and the Court could not be satisfied that the shareholders would be “no worse off” than in what was, in fact, likely to be the relevant alternative. Specifically, Crystal Amber argued that rather than immediate or short term insolvency, Hurricane would continue trading, generate cash, and repay the Bondholders in full by July 2022, after which the economic benefit from Hurricane’s assets would be for the shareholders. In a shining example of access to justice in the modern phenomenon of having Court hearings via Microsoft Teams, over 100 people – most which were private investors – could participate in the hearing, making their voices heard.
The Decision
Having considered the competing views, Mr Justice Zacaroli refused to sanction the scheme. Agreeing with Crystal Amber, the Judge was not convinced that the “relevant alternatives” were as suggested by the Hurricane Board, nor that shareholders would be “no worse off” absent the Hurricane Plan. The Judge recognised that there was every reason to believe, come July 2022, Hurricane would be able to repay the bonds in full, either from available cash or by bridging any shortfall. As the Judge recognised in his judgment, the bondholders’ desire to obtain control of the company was not a good reason to deprive the shareholders, now, of all but a fraction of their equity, rather than waiting to see if the actual performance over the coming months continued to improve.
Conclusion
As Government financial support is withdrawn and the fall-out from the COVID-19 pandemic comes closer into focus, we anticipate that the attempted use of Part 26A Plans will become more frequent.
For shareholders or creditors who find themselves at the mercy of company boards and/or other creditors trying to take control at their expense, this decision could prove pivotal. Having approved the seven previous restructuring plans under the new procedure, far from the rubber-stamp exercise the Hurricane Board and its advisers might have anticipated, this was the first time the Court declined to sanction a Part 26A Plan. It was a terrific result for Crystal Amber and all Hurricane’s shareholders, relieved that its share of the company has not been diluted, and hopeful that Hurricane will now continue to trade profitably with a view to repaying the bonds in full.
Rosenblatt Limited Partner Simon Walton led the charge on behalf of Crystal Amber, supported by Senior Associates Luther Kisanga and Matthew Littlestone, and Trainee George Kestel.
