A UK court has cleared the first case in which the highest class of creditors were compromised as part of a restructuring plan despite its objections. Our Financial Restructuring and Reorganization group describes the background to the plan, the class issues, the nature of the challenge, and the build-up of senior creditors.
- The new interclass law enforcement provisions do not exclude the possibility that a senior creditor
- Dispute over the relevant alternative
- Key takeaways and other cases featuring an interclass cram down
The restructuring plan proposed by a short-term UK mortgage lender, Amicus Finance Plc, and sanctioned by the UK High Court on August 19, 2021 is significant because it is the first plan:
- Promoted by insolvency administrators (to take a company out of administration).
- Offered by a small / medium business.
- Involve a first-ranking creditor because of the court’s application of interclass prohibition provisions. The court effectively allowed the dissenting votes of some secured creditors to be overturned.
Written reasons for the court’s decision to approve the plan will follow.
The company has been under administration since December 2018. The directors proposed the plan because they felt there was not enough cash available to continue funding the administration. The plan was to bring Amicus back to solvency and save the business as a going concern. The directors argued that the plan would offer Amicus creditors a better return than in a liquidation, which they saw as the relevant alternative.
Key elements of the plan
- The injection of around Â£ 3.7million in new funds.
- The making of certain lump sum payments to Amicus expense creditors and preferred creditors in full settlement of their debts and to Amicus secured and unsecured creditors in partial settlement of their debts.
- A cascade of payments on the proceeds of the patrimonial loans to which the company is entitled since the sanction of the plan until December 31, 2022.
Creditors have been divided into five categories
The plan has been approved by four of the five categories of creditors listed in the table below.
The category of senior secured creditors included Crowdstacker Corporate Services Limited and HGTL Securitization Company Limited to the extent that their claims were ranked equally (up to approximately Â£ 4.7 million each). The directors had initially proposed a single category of secured creditors; however, following a challenge from Crowdstacker at the summons hearing, the court ordered the division of this class.
The class of junior secured creditors consisted of a single creditor, HGTL Securitization, for the remainder of its secured claims, not covered by the class of senior secured creditors.
The new interclass stacking provisions do not preclude the possibility of a first-ranking creditor stacking, which occurs when a dissenting first-ranking class of creditors is crammed by a junior class of consenting creditors. Achieving an accumulation of senior creditors can be difficult for a plan and should be carefully planned and specific to the facts. In the absence of a moratorium preventing the enforcement of collateral (for example, when the company is in receivership, as was the case with Amicus), the plan company would need the support of senior secured creditors ( at least the majority capable of controlling the execution process). Otherwise, these creditors would be able to exercise collateral and derail the plan. That said, there may be circumstances where secured creditors are unwilling to perform or where junior creditors control performance (for example, some super senior RCF structures or unitranche facilities).
To sanction a plan involving a prominent creditor, the court must be satisfied that the treatment of creditors under the plan is fair and equitable. It will be necessary to demonstrate that the senior secured creditors are no worse off under the plan than they would be under the relevant alternative. If the relevant alternative is the enforcement of collateral and full repayment, then it would be interesting to see how the courts would react to a plan in which the senior secured debt would be canceled and reinstated with a restructured borrower (presumably with a more solid capital structure) in exchange for a price increase (higher coupon to offset continued credit exposure). It is not yet clear from existing case law how the court will compare the position of a first secured creditor under the plan and in the relevant alternative. The tribunal may consider similar factors that have been relevant in the U.S. Chapter 11 ramp-up cases, including the state of the refinancing market (effective or inefficient) and more complex issues such as as the cost of capital applicable to these secured lenders.
An important guarantee is that the class of creditors who approve the plan against the wishes of the upper class must be a class that would receive payment or have a real economic interest in the business in the relevant alternative. This prevents senior secured lenders or bondholders from being crammed with unsecured creditors or an off-the-stake class of shares.
In the Amicus case, at the meetings of creditors, Crowdstacker (holding 49.98% of the debt in the category of senior secured creditors) voted against the plan, which meant that the plan did not get the support of the required 75% by value of the senior secured creditors category (the highest category).
The other categories of creditors voted overwhelmingly in favor of the plan. The objective of the sanction hearing was therefore Amicus’ request that the court use the âinterclass cram-downâ (which, in this case, is a first-ranking creditor) and sanction the plan despite the failure to obtain the required support from the principal secured creditor. class of creditors.
Crowdstacker Disclosure Request
Crowdstacker has filed a request for disclosure of certain documents regarding a potential failed deal with Cabot Square Capital – a request which, if granted, would amount to providing hundreds of thousands of documents.
The court refused to grant the requested disclosure order on the grounds that the scope of the disclosure was too broad and the requested disclosure order would have been disproportionate for the directors to comply with.
Dispute over the relevant alternative
The legislation on restructuring plans provides that the court may use mandatory inter-class provisions if conditions A and B are met:
Crowdstacker disputed that Condition A was met, on the grounds that the company’s Statement of Estimated Income (EOS) was fundamentally flawed and therefore unreliable in determining the estimated return on a liquidation. In Crowdstacker’s view, the EOS understated the estimated achievements of the company’s loan portfolio and failed to provide value for the sale of the company’s goodwill, intellectual property and assets in liquidation. Additionally, Crowdstacker alleged that the EOS failed to value potential claims that may be presented by a liquidator or creditors in a liquidation (e.g., undervalued transactions).
Even if the two conditions for interclass crowding are met, the court must still be satisfied that it must exercise its discretion to approve the plan. Based on the evidence in this case, the court was satisfied that it was appropriate to exercise its discretion in approving the plan.
The court was asked to order Crowdstacker’s costs and decided to award Crowdstacker Â£ 75,000 plus VAT, part of its costs, as an administrative expense on the grounds that (1) the composition challenges Crowdstacker’s class had succeeded; and (2) Crowdstacker’s lawyer made a significant contribution to the proceedings in court, resulting in changes to the explanatory memorandum.
The key point here is that companies proposing restructuring plans should consider providing for the allocation of potential costs associated with challenges filed by dissenting creditors.
Key points to remember
The Amicus restructuring plan is the first restructuring plan which facilitates the exit from the administration and is considered to be the first restructuring plan proposed by a small / medium enterprise. So far, the court has sanctioned three other restructuring plans applying the new inter-class cram-down provisions (DeepOcean, Smile Telecoms and Virgin Active) and the court is expected to continue to use its new powers.
As shown in the table above, Amicus is the first instance where the highest class of creditors have been compromised as part of a plan despite its objections. Cases of crowding are unlikely to become commonplace due to the specific factual circumstances required for crowding to be a useful exercise for a plan company. It will be interesting to see how case law evolves if more controversial and actively opposed plans involving senior creditors proliferate (for example, when seeking to extend the maturity of senior debt against the will of majority senior lenders) or class manipulation (artificially dividing classes to manipulate the outcome of the creditors’ vote) is reaching UK courts.
In the Amicus case, Crowdstacker disputed the company’s EOS as fundamentally flawed and therefore unreliable in determining the estimated return on liquidation. As the court explained in Active virgin, and reiterated in Hurricane energy, cross-class mandatory provisions can raise difficult valuation questions, and it is therefore important that the usefulness of restructuring plans is not compromised by lengthy valuation disputes, especially where the alternative relevant is an impending liquidation or administration.
Amicus is the first plan used by a company operating in the mid-market and shows that restructuring plans can effectively be carried out profitably even when they are totally opposed (which is associated with additional costs for the company. business). It remains to be seen whether this is just the start of a new trend for mid-sized companies to view restructuring plans as a viable option in the restructuring toolbox.View source.]