This article follows our previous commentary on the English High Court's decision in May 2023 to sanction the Adler Group's restructuring plan and the Court of Appeal's reversal of that decision in February 2024. The recent Court of Appeal ruling in Saipem & Ors v Petrofac represents a further development in the evolving jurisprudence regarding the application of Part 26A of the UK Companies Act 2006.
With a corresponding rise in valuation disputes and out-of-court restructuring solutions in Cayman, this appellate guidance is timely and helpful.
Background
Petrofac Limited and Petrofac International (UAE) LLC (together, the "Plan Companies") proposed two restructuring plans under Part 26A of the UK Companies Act 2006 to compromise approximately US$4 billion in liabilities to address financial distress exacerbated by legacy liabilities, including those arising from the Clean Fuels Project in Thailand. The plans were sanctioned by the High Court on 20 May 2025, despite opposition from dissenting creditors (i.e. Saipem and Samsung), who were exposed to significant liabilities arising from the Clean Fuels Project.
The High Court found that the dissenting creditors were not "worse off" under the restructuring plans compared to the relevant alternative (i.e. liquidation), and that the allocation of value under the restructuring plans was fair. The Court of Appeal disagreed.
The English Court of Appeal Decision
On 1 July 2025, the Court of Appeal overturned the High Court's sanction of the Plan Companies' restructuring plans. While the Court approved the High Court's interpretation of the "no worse off" test under section 901G(3), it found that the first instance judge had erred in exercising his discretion to sanction the plans.
The Court held that the allocation of equity to the providers of new money, who were to receive over two-thirds of the post-restructuring equity, was not justified by evidence of market testing or expert valuation. The Court also found that the High Court had failed to consider whether the returns on the new money were excessive relative to what could have been obtained in the market, and that this vitiated the fairness of the restructuring plans.
Building on Adler
The Petrofac decision builds on the principles set out by the Court of Appeal in Adler, particularly the importance of a fair allocation of the benefits of a restructuring. In Adler, the Court of Appeal emphasised that the cross-class cram down power should not be used to allow assenting classes to appropriate an inequitable share of the restructuring surplus. The Court of Appeal's decision in Petrofac to overturn the restructuring plans echoes this principle by scrutinising the evidentiary basis for the allocation of value to new money providers.
The Court of Appeal also reaffirmed that the burden lies with the plan company to justify the fairness of the plan, aligning with the Court of Appeal's decision in Adler which emphasised transparency, valuation rigour, and the need for a genuine commercial compromise among stakeholders.
Key Takeaways
- Burden of Proof on Plan Companies: The Court reiterated that the burden lies with the Plan Companies to justify the fairness of the restructuring plan, including the pricing of new money and the allocation of value.
- Market Testing and Valuation Evidence: Where new money providers receive a substantial share of the restructuring surplus, the Plan Companies must provide cogent evidence, either expert valuation or market testing, to justify the pricing.
- Returns on New Money Scrutinised: The Court found that the 211.7% return on new money was not supported by evidence of market comparables or risk-adjusted pricing, and that this undermined the fairness of the plan.
- Out-of-the-Money Creditors Not to Be Ignored: The Court reaffirmed its position in Thames Water that out-of-the-money creditors cannot be excluded from consideration in the fairness analysis simply because they would receive nothing in the relevant alternative (i.e. liquidation).
- Discretion Must Be Exercised on a Proper Basis: The High Court's failure to consider the implications of the equity valuation and the lack of market testing led to a material error in the exercise of discretion.
- Cross-Class Cram Down Not a Tool for Value Appropriation: The Court emphasised that Part 26A is not intended to allow assenting classes to appropriate value at the expense of dissenting creditors without proper justification.
Application in Cayman
Although it is decided under a different regime, the Petrofac decision is likely to have an impact on how the Cayman courts approach liquidation analysis and the assessment of different alternatives. In particular, where new money providers are to receive a substantial share of any restructuring surplus, debtor companies must be prepared to demonstrate that the pricing is competitive and justified.
The decision also signals that Courts will not hesitate to scrutinise the commercial terms of a restructuring plan, especially where aggrieved creditors raise credible objections. It reinforces the principle that restructuring plans must reflect a genuine commercial compromise among stakeholders, rather than a mechanism for value transfer to favoured parties.
Prospective Restructuring Officers, valuation experts, liquidators and their legal advisers need to be aware of these developments in the context of preparing and presenting proposed solutions to Courts and stakeholders. There are also lessons relevant to other valuation disputes outside of a pure restructuring context, given the appellate court's treatment of the different methodologies and reports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
