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This case analysis looks at whether Condition A (the no worse off test) requirement for cross class cram down (CCCD) under a Part 26A restructuring plan (or Part 26A plan or Part 26A scheme) was satisfied. We consider the written judgment of Mr Justice Zacaroli following the three-day contested sanction hearing.
Re Hurricane Energy plc  EWHC 1759 (Ch)
What was the background?
This was an application by Hurricane Energy plc for an order sanctioning a restructuring plan pursuant to Part 26A of the Companies Act 2006 (CA 2006) (ie the sanction hearing). This is the first time where courts have refused to sanction a plan under the new CCCD rules for a Part 26 restructuring plan (or Part 26A plan or Part 26A scheme) created by CIGA 2020.
Two meetings were convened and voted as follows:
The company sought the court’s sanction of the plan using the CCCD powers.
After the practice statement letter had been circulated, one of the second largest shareholders, Crystal Amber, filed a CA 2006, s 303 notice calling a general meeting (convened for 5 July 2021) to remove five directors and to replace them with their representatives. The ad hoc group of bondholders (AHC)(representing 66% of bondholders) had threatened to appoint its own independent liquidator if the board was replaced.
What did the court decide?
Zacaroli J gave a detailed written judgment explaining his reasons for refusing to sanction the plan. Ultimately he decided that condition A (the no worse off test) under CA 2006, s 901G required for CCCD had not been satisfied here.
Following Mr Justice Trower in Re Deep Ocean 1 UK Ltd  EWHC 38 (Ch), he decided that a broad approach should be followed and particular care should be used if (as here) shareholders were being deprived of all but a fraction of their shareholdings; in determining whether shareholders are ‘any worse off’ as a result of the plan it is necessary to take into account all incidents of their rights as shareholders.
Condition A: although the company had originally presented two alternative outcomes if the plan was not sanctioned: (i) uncontrolled liquidation or (ii) controlled wind down and trading until May 2022, then decommissioning, Zacaroli J found that controlled wind down was the relevant alternative. He applied the three step approach outlined by Mr Justice Snowden in Re Virgin Active Holdings Ltd  EWHC 1246 (Ch) when assessing condition A:
Wrongful trading: it was not suggested that the triggering point for wrongful trading had been reached. Zacaroli J did not accept that the duty to take into account the interests of creditors is to be equated with the obligation to take every step with a view to minimising potential loss to creditors. Nor did he accept that the directors could not properly enter into an extension of a charter (essential to the ongoing business) while the company’s ability to repay the bonds at maturity remained in doubt.
Burden and standard of proof: the company had to prove the ‘no worse off’ test was satisfied. Given that the relevant alternative involves on each side’s case the company’s continued profitable trading for at least a further year, this did not require the court to find that the most likely outcome from the relevant alternative is that there will be a return to shareholders at some point in the future. Rather, the fact that there is a realistic prospect (based on one, other or a range of the possibilities discussed, including through refinancing any shortfall) that the company will be able to discharge its obligations to the bondholders, leaving assets with at least potential for exploitation, is enough to refute the contention that the shareholders will be no better off under the relevant alternative than under the plan. Zacaroli J concluded that to retain 100% of the equity in a company that is continuing to trade, with a realistic prospect of being able to repay the bonds in due course, was to his mind a better position than immediately giving up 95% of the equity with a prospect of a less than meaningful return as to the remaining 5%.
Urgency and imminent board replacement: the fact that board was likely imminently to be replaced was not in Zacaroli J’s judgment a good ground of urgency (particularly as he had rejected the submission that the new directors would be likely to take precipitate action leading to an early insolvent liquidation). Unless and until a company goes into a formal insolvency process, the identity of those managing it is under the ultimate control of the general body of shareholders. It is their collective right to replace the board if they see fit. While actual or likely insolvency causes a change in the content of the duty of the directors (and, provided it can be shown that there is no economic value in the shares, entitles the creditors in a restructuring to determine allocation of value as between interested stakeholders), absent the intervention of a formal insolvency proceeding it does not remove the shareholders’ rights under the articles of association, including to appoint and remove directors. The AHC’s desire to avoid the replacement of the board was not a legitimate ground for urgency, so as to justify taking any different approach to the assessment of the likely consequences in the relevant alternative taken above.
It remains to be seen whether this case will be successfully appealed; the company have said they are considering all options, including appeal.
For further details of the new provisions regarding restructuring plans, see Practice Notes: Corporate Insolvency and Governance Act 2020—restructuring plan provisions, Corporate Insolvency and Governance Act 2020—frequently asked questions (FAQs) on the restructuring plan, and Corporate Insolvency and Governance Act 2020—differences between restructuring plans, schemes of arrangement, and CVAs.
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