Petrofac Restructuring Plan Overturned By The Court Of Appeal

On 1 July 2025 and by a unanimous decision, the Court of Appeal has set aside the order made by Marcus Smith J in May sanctioning Petrofac's two inter-conditional restructuring plans promoted under Part 26A of the Companies Act 2006 (the Plans).¹

The ruling marks the third appellate decision on restructuring plans (following Adler and Thames Water) and the second occasion on which the Court of Appeal has overturned a previously sanctioned plan.

Key takeaways from the judgment

• Fair allocation of value: It seems clear now that, at least in some cases, there will be significant sensitivity in relation to the fair allocation of post-restructuring value and over-reliance on relevant alternative outcomes (including that certain creditors may be out-of-the-money) as the sole determinant should be treated with real caution. In practice, what this will mean is greater scrutiny of how the benefits of a particular transaction are shared amongst stakeholders and justified accordingly and we would expect to see greater engagement by the debtor with its stakeholders.
• Evidence and burden of proof: Proposed allocations need to be justified by reference to additional evidence beyond the relevant alternative report. This case re-affirms that the plan process is a heavily evidence-dependent process, and the burden of proof to justify fair allocation of post-restructuring value is a burden that the plan company will need to discharge.
• Pricing: While not a hard-and-fast rule requiring market testing, evidence of market testing or from a market expert would have assisted the Court considerably in assessing the fairness of the proposal. Historic difficulties in raising capital are not necessarily a determinative guide for the appropriate cost of post-restructuring capital.
• Proper use of cross-class cram down powers: The Court should be reluctant to exercise its cross-class cram down powers where there have not been genuine attempts to negotiate a reasonable deal with all affected stakeholders—it is most properly used to enable a restructuring to proceed over the unreasonable opposition of hold-out creditors.
• Restructuring plans becoming increasingly contentious: As in a number of recent plan cases (such as Thames Water), dissenting creditors are increasingly willing to contest plans in court (albeit the number of successful challenges remains low).

Background: why the Plans were proposed

The Petrofac group provides design, construction and operational services to the energy industry. The group's financial difficulties started in 2017, when the UK's Serious Fraud Office (SFO) began to investigate the group, which resulted in a fine of GBP70 million in 2021 for failing to prevent bribery by associated persons. The business continued to suffer because of the COVID-19 pandemic and the war in Ukraine, and a 2021 refinancing failed to remedy its precarious position. In addition, in 2018 Petrofac had partnered with the Samsung and Saipem groups in a joint venture to help deliver a project in Thailand (the Clean Fuels Project) on behalf of Thai Oil Public Company Limited (Thai Oil). The project was beset with problems, resulting in a termination of the Clean Fuels Project in April 2025—Samsung, Saipem and Thai Oil may each have significant claims against Petrofac as a result.

In essence, the Plans were intended to:

• implement a swap of certain senior secured debt for shares in Petrofac Limited (listed on the London Stock Exchange)
• facilitate the injection of at least USD350m of new senior secured notes and equity (made available by certain electing existing senior secured creditors, certain existing shareholders and directors of the group and a new external investor) together with a new USD80m cash back guarantee facility (made available by an existing senior secured creditor and the new external investor)
• compromise claims arising from the Clean Fuels Project
• compromise certain liabilities arising from the SFO's investigation.

Saipem and Samsung opposed the Plans on a number of grounds at both the convening and the sanction hearings and brought the present appeal.

Grounds of appeal

Samsung and Saipem appealed against the sanction of the Plans on the following grounds:

1. The benefits preserved or generated by the Plans (the so-called "restructuring surplus") were not being fairly shared between the creditors of Petrofac (the Fairness Ground).
2. That they would in fact be "worse off" under the Plans than in the relevant alternative (an insolvent liquidation of the group companies) (the No Worse Off Ground).

The Court of Appeal dismissed the appeal on the No Worse Off Ground, but allowed it on Fairness Ground.

What did the Court of Appeal decide?

FAIRNESS GROUND—FAIR ALLOCATION OF THE BENEFITS OF THE RESTRUCTURING

The Fairness Ground related to the allocation of the new equity to be issued in Petrofac Limited:

• The terms on which over two-thirds of the new equity was to be allocated to both the new money funders and to the ad hoc group (in the form of work fees) had been fixed on the basis of a notional post-restructuring equity value of USD351m.
• However, the valuation report eventually provided in evidence showed that the value preserved or generated by the Plans was, in the low case, likely to be approximately USD1.25 billion —the result of the difference between the day one equity value of the restructured group (USD1.5bn) and the USD250m that would be available for distribution to creditors in a liquidation of the group.
• Of this estimated low case value, approximately USD1bn would be allocated to new money providers by the Plans. This included a backstop fee with a value of USD62.6m, issued in relation to the provision of USD187.5m of the new money. The ad hoc group work fees (which were initially valued at USD7.1m on the original notional valuation) amounted to USD24.1m on the updated valuation.
• However, as Samsung and Saipem argued, it was the proposed compromise of the existing secured and unsecured claims against the companies that was likely to result in the substantially increased equity value once the plan had been implemented.

Marcus Smith J had considered this allocation from a fairness point of view but believed it to be a fair apportionment on the basis that providing new money to the Petrofac group was high risk and justified a large return. Samsung and Saipem however argued that the risk of the new money had been overstated given that the restructuring would relieve Petrofac of a significant proportion of its debt burden and would result in a profitable group going forward, and that Petrofac had not conducted any market testing to confirm whether the pricing of the new money was competitive.

The Court of Appeal agreed with Samsung and Saipem and made the following observations:

• The High Court had focused on the pre-restructuring risks associated with lending to the Petrofac group (in significant financial distress) as justification for the high returns to new money providers, whereas the correct question should have been at what cost the new funding could have been raised after (and conditional on the completion of) the Plans and the restructuring, which as noted above would have substantially cleaned up the Petrofac balance sheet and created a stable platform going forward.
• The burden of showing that a restructuring plan is fair falls on the proposing company. Petrofac had provided no evidence (e.g., of market testing or benchmarking) to demonstrate that the allocation of value to the new money providers reflected the fair market cost of such funding (and associated backstop) or was otherwise justified based on the proposition of lending to a post-restructuring group with a right-sized balance sheet. On the contrary, as noted above the terms on which the bulk of the new equity was to be allocated remained unchanged despite the valuation report showing the equity rights to be considerably more valuable than the initial notional amount had shown.
• If the price of new money becomes disproportionate in terms of the allocations of the restructuring surplus to the new money providers and the returns are "materially in excess of what could be obtained in the market", those returns become a benefit of the restructuring (rather than a cost of it) and their allocation "needs to be specifically justified".
• Simply giving all creditors the right to participate in new money funding, or noting that certain creditors who were offered the right to participate chose not to do so, do not of themselves remedy the issues identified above, which the Court would still need to consider in terms of assessing overall fairness.

It may be possible to apply a number of these principles to other comprehensive balance sheet restructuring plans, but the fairness of each restructuring plan needs to be considered in light of the specific applicable facts. For example, it may not necessarily be appropriate to consider the market pricing for new money based on a post-restructuring position in cases where the proposed plan will have a limited effect on the balance sheet, and/or a comparable market test may not be possible where a company does not have the same access to the debt and equity capital markets as Petrofac did.

FAIRNESS GROUND—TREATMENT OF OUT OF THE MONEY CREDITORS AND THE PURPOSE OF CROSSCLASS CRAM DOWN

The Court of Appeal echoed statements made in the Thames Water appeal judgment that what constitutes a "fair" treatment of out of the money creditors will vary from case to case, and will at least need to be considered in every instance. The fact that certain creditors may be out of the money in the relevant alternative will not necessarily of itself justify (from a fairness perspective) the allocation of nothing more than a token amount of value to such creditors (even if they would technically be "no worse off" under the plan proposals).

The primary purpose of cross-class cram down is to enable the Court to prevent classes of creditors from exercising an "unjustified" veto right over a restructuring where there has been a genuine effort to negotiate an acceptable and reasonable deal amongst the affected classes (including out of the money classes) —for example, if dissenting creditors were unreasonably holding out for better terms. It was not intended to be used to allow certain in the money creditors to "appropriate" a disproportionate amount of the restructuring benefits and value for themselves.

NO WORSE OFF GROUND

Samsung and Saipem pointed out that, while it was correct that they would expect to recover more in respect of their claims against Petrofac under the Plans than in the relevant alternative, if Petrofac went insolvent, Samsung and Saipem would also benefit from the loss of a competitor in the market (estimating profits of around USD340m from additional business in such scenario). At first instance, Marcus Smith J had held that such "indirect benefits" were "too remote" and difficult to quantify for the purposes of the "no worse off" test.

The Court of Appeal agreed that the "no worse off" test was satisfied here, but adopted different reasoning to the High Court:

• The "no worse off" test requires a comparison of the financial value of the creditor's rights in the relevant alternative with the value of the new or modified rights they receive under the plan—this was the correct approach rather than a form of remoteness test.
• There is a key distinction between a creditor's rights being compromised by or received under a plan, and their broader interests in the plan successfully being implemented or not—the no worse off test focuses on the question of rights, whereas any broader benefit or prejudice that a creditor believes it may receive as a result of a plan being sanctioned goes more to the judge's discretion to sanction a plan.
• For the purposes of the "no worse off" test, the scope of a creditor's rights will also include rights against third parties being compromised by a plan (such as releases of guarantees provided by non-plan companies to prevent so-called "ricochet" claims).

Footnote

1. Re Petrofac Limited and Petrofac International (UAE) LLC [2025] EWHC 1250 (Ch)

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