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Restructuring & Insolvency analysis: The Court found that administration was not a complete answer to the requirement of condition A for restructuring plans proposed under Part 26A of the Companies Act 2006 (CA 2006). It was also necessary to show that condition A was satisfied on the evidence available. Separate classes were also required for the senior and junior secured debt. Written by Andrew Mace of 9 Stone Buildings who acted for Crowdstacker Corporate Services Limited (Crowdstacker).
Re Amicus Finance Plc (convening judgment) [2021] EWHC 2255 (Ch)
What are the practical implications of this case?
Administrators proposing Part 26A Restructuring Plans still need to show “the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”. That is not automatically established merely because the company is in administration.
If a creditor holds composite debt – that is to say debt that has different rights attached to its constituent elements – then the debt should sit in different creditor classes depending on the rights attaching to it. A simple test, as expounded by Snowden J, is to ask: if the balance of debt that has different rights attaching was held by a third party would that third party be entitled to be put in the same class as the other debt holders. If the answer is no, then there will be a requirement for the debt to be split between classes.
What was the background?
Condition A
Condition 901A (2) of CA 2006 provides: “Condition A is that the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.
It had been submitted that Condition A is met simply by virtue of the company being in administration.
Classes
There was also a dispute as to the composition of creditor classes. The administrators had proposed that there be one creditor class for secured creditors. Crowdstacker objected.
The administrators had proposed four classes of creditors which would have resulted in Crowdstacker and HGTL Securitisation Company (HGTL) being in the same class with the result that Crowdstacker’s vote would be overwhelmed. This would have allowed the approval of the restructuring plan despite the fact Crowdstacker’s debt was senior secured debt and HGTL’s debt was split between senior and junior secured debt.
Crowdstacker objected and Snowden J found that the correct classification required HGTL’s votes to be split between the senior debt that would comprise the same class as Crowdstacker and another class in which HGTL’s junior debt would sit. As a result Crowdstacker had a veto vote requiring the administrators to seek the cross-class cram-down (CCCD) at the sanction hearing.
What did the court decide?
Snowden J found at [para 71]:
“administration does not appear to me a complete answer to the question of whether, at the time a plan is proposed, a company has encountered or is likely to encounter financial difficulties that are (currently) affecting or will or may (in the future) affect its ability to carry on business as a going concern. For example, one could easily envisage an administration which was entered into as a result of temporary cashflow problems, which are being addressed and in which there is a surplus of assets over liabilities, such that the company is not and will not in the future face any difficulties in carrying on business as a going concern. In those circumstances, there would be a real question as to whether Condition A was satisfied.”
Snowden J found:
“87. It is clear that the existing rights of Crowdstacker and HGTL Securitisation against the company are similar, but only up to a point. Although Crowdstacker and HGTL Securitisation stand shoulder to shoulder in respect of their senior debt up to the value of the amount owing to Crowdstacker, there is a clear distinction between their rights thereafter. Once Crowdstacker has been paid in full, it has no further rights and nothing to compare with HGTL Securitisation's rights to receive a further payment in respect of the balance of its debt, in respect of which it only has a junior charge.
88. That difference in existing rights is reflected in the structure of the Waterfall under the Restructuring Plan and the anticipated returns to the Secured Creditors in respect of the different tranches of debt. As I have said, the senior ranking debt sits at the fourth limb of the Waterfall and must be satisfied in full prior to any payments being made to HGTL Securitisation in respect of its junior ranking debt. According to the Administrators, value is expected to break within that fourth limb, such that the senior ranking debt will not be satisfied in full, and it is unlikely that there will be any payment in respect of the junior ranking debt.
89. Such difference in existing rights and their treatment under the Restructuring Plan means that there is little or no commonality of commercial interest as regards the holders of those different rights in their capacity as such. In truth, the only common feature is that one creditor – HGTL Securitisation – has an interest in both sets of rights. But to focus on the identity of the creditor, rather than the rights which the creditor possesses, is not the correct approach. That can be illustrated by the many cases in which, for example, the same financial institutions hold debt in a variety of different syndicated loans or under different debt instruments issued by the same debtor, and may be required to vote in respect of their different claims in different classes if the terms and treatment of the debts are materially different. Or cases in relation to insurance companies, in which policyholders with similar policies may have different categories of claim (e.g. admitted claims or IBNR) and may therefore be required to vote separately in respect of the different types of claim that they hold depending on how such claims are treated under the scheme.
90.The point can also easily be tested by asking whether, if the balance of HGTL Securitisation's debt forming the junior debt had been held by a completely unrelated third party, rather than by HGTL Securitisation, it would have been possible for that third party to be put into the same class as Crowdstacker and HGTL Securitisations in respect of their senior debts so as to be able to discuss the merits of the Restructuring Plan together. The answer is plainly "no", since the different ranking of the claims in the relevant alternative and the treatment of the claims under the Restructuring Plan would mean that the third party would have no prospect of being paid anything in respect of its junior claim unless and until Crowdstacker and HGTL Securitisations had been paid in full in respect of their senior claims.
91.The point is further illustrated by the fact that Crowdstacker and HGTL Securitisation will share the lump sum payment of £150,000 to be made under the Restructuring Plan equally rather than proportionately to the full amount of their claims. That seems to attribute no value to the residual portion of HGTL Securitisation's debt.
92. I will therefore direct that Crowdstacker and HGTL Securitisation should form a single class in respect of their respective secured claims up to the value of Crowdstacker's senior debt, and that HGTL Securitisation should form a separate class in respect of the balance of its claim."
Case Details
Court: Chancery Division
Judge: Snowden J
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