High Court orders expedition to determine issues relating to a financial restructuring given insolvency alternative (McLaren Holdings Ltd v US Bank Trustees Ltd)

High Court orders expedition to determine issues relating to a financial restructuring given insolvency alternative (McLaren Holdings Ltd v US Bank Trustees Ltd)

The High Court has expedited a trial at which it would be determined whether luxury car manufacturer McLaren Group could obtain the release of certain security for the benefit of its senior noteholders, failing which a financial restructuring which was contingent on that release could not be implemented. The court concluded that, absent determination of the proceedings within one month, McLaren Group would have no choice but to enter an insolvency process and that this justified expedition in this case. Written by Natasha Johnson and Andrew Cooke of Herbert Smith Freehills.

McLaren Holdings Ltd v US Bank Trustees Ltd [2020] EWHC 1892 (Ch)

The court also held that a senior noteholder should be joined to the proceedings to represent the interests of the senior noteholders.

The decision provides a useful illustration of the willingness of the courts to support efforts to financially restructure a company and save it from insolvency, even where the company does not seek assistance of the court via a more commonly used restructuring jurisdiction of the court (such as its ability to sanction a scheme of arrangement). That is particularly the case where all parties to the dispute have an interest in the company’s survival and ability to meet its debts as they fall due, as demonstrated by the senior noteholders’ decision in this case not to oppose expedition. For companies and their creditors dealing with urgent liquidity crises, the court’s practical approach in this case will be welcomed.

Background

As a result of the coronavirus (COVID-19) pandemic, McLaren fell into severe financial difficulty, to the point that it was forecast to run out of money by 17 July 2020. If McLaren ran out of money, the court concluded ‘that will be that for the company’.

In order to raise new money, McLaren proposed a restructuring of its senior notes including the release of certain security which was granted for the benefit of senior noteholders so that the secured assets could instead be used to secure new debt. McLaren’s proposals were opposed in correspondence by its existing senior noteholders, who argued that it would be unlawful for the existing security over the cars and properties to be released. The senior noteholders also wished to make proposals to refinance the company based on their existing security package, but McLaren did not wish to pursue that form of refinancing.

As a result, on 16 June 2020, McLaren filed a Part 8 claim against US Bank Trustees Ltd (USBT) seeking a declaration that the security interests could be released. USBT was the sole defendant and, as a mere security agent and trustee for the senior noteholders, USBT raised concerns that, without the participation of a senior noteholder in the proceedings, there was a risk that senior noteholders could challenge the situation even after the declaratory relief had been granted.

That risk was exacerbated where the senior noteholders had already noted their objection to the release of the security in correspondence. If a senior noteholder was to be joined to the proceedings, there was an issue as to whether that senior noteholder should be joined in a representative capacity effectively on behalf of all senior noteholders. One senior noteholder had requested to be joined to the proceedings so the questions for the court were whether it should be joined and, if so, whether it should be taken to represent the interests of (and therefore effectively bind to any judgment) the other senior noteholders.

Having issued proceedings, McLaren applied for expedition. Its proposed timetable was described by the court as ‘incredibly compressed’ and ‘ambitious’, requiring not only a trial but also the handing down of a final judgment by 10 July 2020. McLaren’s evidence was that, if the judgment was in its favour, this would leave five working days between 10 and 17 July 2020 for the relevant security to be released and the financial restructuring completed.

Decision

The court dealt with expedition first. It concluded that expedition would not involve an unfair or improper allocation of court resources to the parties to this dispute relative to the parties to other disputes before the court. That was particularly so where McLaren’s survival depended on the financial restructuring, which could only be completed if the court determined that the existing security in favour of the senior noteholders should be released. The court also pointed to the need for this sort of case to be given priority given the objectives of the Financial List and the significance in value and consequences for McLaren of this dispute.

The court’s principal concern was whether the expedition of a final judgment within one month from the issue of proceedings could practically be achieved and, if so, whether that would compromise the need for there to be a just trial. No party suggested that it would not be possible for there to be a fair trial within three weeks and the court concluded that all parties seemed able to cope with the expedited timetable proposed, notwithstanding that it was ‘one of the most aggressive trial timetables [the court had] ever seen’.

However, the order for expedition was made subject to two conditions. First, McLaren had to explain what steps it was proposing to take in relation to the security and the financial restructuring more broadly. That is because McLaren’s evidence in support of the application had stated only what form the financial restructuring might take, not the form it actually would take.

Second, and more importantly, the senior noteholder who wished to be joined to the proceedings would need to submit a position paper identifying the points that it wished to take when arguing that release of the security would be unlawful. Pending sight of that position paper, the court was not able to conclude that a judge would have sufficient time to prepare for trial because the issues in dispute had not been fully canvassed in statements of case, given that the application for expedition had been made before a defence had been filed. The court directed that, upon service of a position paper, the question of expedition would be revisited.

The parties having agreed that a senior noteholder would be joined to the proceedings, and a willing senior noteholder having been identified, the court ordered joinder. While USBT did not object to joinder, it did ask the court to clarify CPR 19.7A, which provides that where a claim is brought against a trustee in that capacity, it is not necessary also to join the beneficiaries and that the beneficiaries will nevertheless be bound unless the court orders otherwise. USBT was concerned to ensure that all creditors of McLaren for whom USBT acted as trustee were bound by any judgment in the proceedings.

The court indicated that, at first blush, it was inclined to agree with USBT that CPR 19.7A did mean that all beneficiaries of trusts of which USBT was the trustee would be bound by any judgment in the proceedings, but it refused to make a determination to that effect at this early stage in the proceedings, particularly given that it was not yet clear what arguments would be advanced by the willing senior noteholder and that there were certain contractual documents which may be in issue in the proceedings which bound other classes of interested parties (including other categories of creditors), who it may be appropriate to join to the proceedings at a later stage. Accordingly, CPR 19.7A could not be used at this stage to bind all creditors of the company.

Turning to the other method of binding parties who were not joined to the proceedings, the senior noteholder who was willing to be joined to the proceedings was content to represent other noteholders of his class, but not creditors more generally or anybody else. USBT conceded that the willing senior noteholder could not represent creditors generally given the potential conflict between the position of different classes of creditor. The court added a further reservation, that the willing senior noteholder could not be made to represent any class of persons he did not wish to represent. As a result, the court order that the willing senior noteholder should represent only other senior noteholders.

Natasha Johnson is a partner in the Disputes Resolution and Restructuring and Insolvency practices of Herbert Smith Freehills. She has a wealth of experience in commercial disputes and restructuring and insolvency scenarios across a range of sectors and her practice is increasingly focused on professional and financial services litigation and investigations, including internal and regulatory investigations and inquiries as well as contractual and shareholders’ disputes, directors’ duties and corporate governance matters. Natasha has advised on a number of the largest and most complex and high profile cases of recent years and is recognised for her technical excellence and commercial approach.

Andrew Cooke is a senior associate in the Dispute Resolution and Restructuring and Insolvency teams of Herbert Smith Freehills and advises on a broad range of commercial litigation matters, focusing on company, directors’ duties and insolvency litigation, finance litigation and shareholder and joint venture disputes. He acts for a high profile client list, including banks, professional services firms, administrators and liquidators and listed corporates, as well as high net worth individuals.

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