A restructuring plan in respect of Hurricane Energy plc under section 901F Companies Act 2006 failed to achieve court sanction in circumstances in which it was supported by 100% of the company's bondholders but rejected by 92% of voting shareholders (Re Hurricane Energy plc [2021] EWHC 175 (Ch)).

The company was formed in 2004 to undertake oil extraction. It had raised US$300 million by an equity placing and US$230 million from the issue of convertible bonds. Difficulties had recently led to a significant reduction in the estimate of available oil reserves such that it was thought that extraction from one well in particular would become uneconomic in the first quarter of 2024.

The restructuring plan prompted by that projection envisaged:

(1) an extension of the maturity date of the bonds to 31 December 2024;

(2) a reduction of US$50 million in the capital amount due under the bonds;

(3) an increase in a cash coupon under the bonds from 7.5% to 9.4% per annum, and the introduction of an additional payment in kind coupon of 5% per annum;

(4) a cash sweep provision, so that if on any interest repayment date there was surplus cash, it would be used to make partial capital repayment of the bonds;

(5) provision of security and guarantees from the Company and two subsidiaries;

(6) the issue of shares to the bondholders, the effect of which would be that the bondholders would hold 95% of the diluted equity, with the existing shareholders retaining only 5% of the diluted equity.

The company would ultimately undertake an extended wind-down with a view to continuing oil production until it reached its economic limit (projected to be in the first quarter of 2024); subject to any possible further investment, all third-party claims would be settled and the company would be put into liquidation.

Certain shareholders opposed the sanctioning of the plan.

Zacaroli J noted the application to a restructuring plan of the matters the court would consider under Part 26 Companies Act as set out by Snowden J in Re Noble Group Ltd [2018] EWHC 3092 (Ch), but then turned his attention to the major difference between a Part 26 scheme and a plan under Part 26A where not all the relevant classes of creditors and/or members had approved the plan, namely the ability of the court to exercise its discretion under s 901G to sanction a plan notwithstanding the fact that one or more of the scheme classes had not approved it by the requisite majority (so-called "cross-class cram-down").

Section 901G empowers the court to sanction provided that two threshold conditions are met (section 901G(2)-(5)):

Condition A: "the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative."

Condition B: "the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative."

The "relevant alternative" is defined by section 901G(4) as "whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F."

Condition A, the judge said, involved three steps:

(1) identifying what would be most likely to occur in relation to the company if the plan was not sanctioned:(2) determining the outcome or consequences of that for the shareholders;

(3) comparing that outcome with the outcome and consequences for the shareholders if the plan was sanctioned: Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch).

Condition B had been satisfied in this case. The dispute was about Condition A. Resolving that dispute involved consideration of complex financial and other factors, including expert evidence. It resulted in the judge deciding that the case was not an appropriate one in which to apply the cross-claim cram-down provision:

"Given that the relevant alternative involves on each side's case the Company's continued profitable trading for at least a further year, I do not think this question requires me to be satisfied – in order to find against the Company – that the most likely outcome from the relevant alternative is that there will be a return to shareholders at some point in the future. In my judgment, the fact that there is a realistic prospect (based on one, other or a range of the possibilities outlined above, 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."

Or as the judge put it, "[T]o 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, is to my 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%."

Having concluded that Condition A had not been satisfied, the judge held that the discretion whether to sanction the plan did not fall to be exercised, but he said that, had it been necessary to exercise it, the points he had made in his principal findings would have led him to to refuse to exercised it so as to sanction the plan.

The judgment is notable as the first case in the limited life of restructuring plans in which the court has refused to sanction in the face of opposition and on the basis that the "no worse off test" had not been satisfied. The company had already suffered a major set back at the earlier convening hearing at which the judge had directed that two meetings be convened, one for bondholders, another for shareholders, when the company sought a single meeting. Another factor in the failure of the plan seems to have been the product of what the judge described as "considerable discontent among the shareholders with the current board who, it is said, have failed to engage as promised with the shareholders," apparently giving greater attention to bondholder interests, a human rather than a legal lesson, perhaps.

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