Case update: Re AGPS Bondco PLC [2024] EWCA Civ 24

Introduced amidst the Covid-19 Pandemic, Part 26A Restructuring Plans are becoming an increasingly utilised tool for effective business recovery and turnaround. As knowledge of the scheme develops – thus increasing confidence amongst restructuring practitioners – we are likely to see the Part 26A Restructuring Plan continue to play a significant role in  the restructuring and insolvency landscape.

In short, Part 26A Restructuring Plans – so called as they are governed by Part 26A of the Companies Act 2006 (“Part 26A”) –  enables a company experiencing financial difficulty to agree a compromise or arrangement with its creditors in the form of a restructuring plan. Creditors will vote on the plan, but the court must sanction it  if the plan is to become binding on creditors.

One distinguishing feature of a Part 26A Restructuring Plan is that the court has the power to sanction a plan even where approval by all classes of creditors has not been obtained. This is known as a cross-class cram down. Under s901G of the Companies Act 2006 (“Section 901G”), a cross-class cram down is permitted where the following conditions are met:

• Condition A: none of the members of the dissenting creditor class would be worse off under the proposed plan than they would be in the event of the relevant alternative – (where the relevant alternative is whatever outcome the court considers would be most likely to occur if the plan were not sanctioned). This is also known as the “no worse off” test.
• Condition B: At least 75% in value of one of the classes of creditors who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative has approved the plan.

For the first time, in the case of Re AGPS Bondco plc [2024] EWCA Civ 24, the Court of Appeal has considered key considerations that apply when a court is deciding whether to exercise its discretion to sanction a restructuring plan in circumstances where the approval of all classes of plan creditors has not been obtained.

Background

The Plan Company, AGPS Bondco Plc, forms part of The Adler Group which manages and deals with a portfolio of residential real estate in Germany. The group business was adversely impacted by various global economic downturns including the pandemic and a general decline in the property market.

The indebtedness of the group business included a series of senior unsecured notes with maturity dates ranging from 2024 to 2029 (the “Loan Notes”).

In an attempt to improve the liquidity of the group business, the Plan Company proposed a restructuring plan pursuant to Part 26A (the “Plan”). As part of the Plan, one proposal was that the maturity date for the 2024 Loan Notes were to be extended.

Meetings had been convened for the six classes of creditors to meet and vote on the Plan.  Although the requisite majority – 75% in value – was obtained in five of the six classes, in the meeting of the class of creditors under the notes maturing in 2029 (the “2029 Noteholders”), the Plan was approved by just 62.28% of those voting.

Given that the 2029 noteholders had not approved the Plan by the requisite majority, the Plan Company asked the court to sanction the plan using the cross-class cram down provisions under Section 901G. If the court decided to exercise such powers in sanctioning the Plan, this would bind the dissenting class.

At first instance, the High Court sanctioned the plan.

The 2029 Noteholders appealed this decision. Some of the principal grounds of appeal were as follows:

• Owing to the differing maturity dates of the Loan Notes, there was a material departure from the pari passu principle – things ranking equally – which would apply in a formal insolvency process i.e., the relevant alternative. The effect of this was that there was a greater risk of non-payment upon the 2029 Noteholders than on the holders of other Loan Notes; and that no good reason had been shown for this differential treatment.
• The judge had incorrectly applied the rationality test derived from schemes of arrangement under Part 26.
• The judge had incorrectly held that no investigation as to whether the Plan could have been improved was needed.

Decision

The Court of Appeal allowed the appeal.

It was held that the court at first instance had failed to correctly exercise its discretion to sanction the Plan, largely owing to the sequential payments of the series of Loan Notes.

It held as follows:

• Departure from pari passu principle – when comparing the treatment of creditors under the Plan, this should be compared with how they would be treated in the relevant alternative. In a formal insolvency process, the Loan Notes would rank equally as unsecured debts (irrespective of their maturity dates) and the note holdings would be paid out on a pari passu The Plan, on the other hand, maintained sequential payments of the Loan Notes. The Court of Appeal held that the Plan’s differential treatment of the creditors under the Loan Notes meant that it had departed materially and without good reason from the principle of pari passu.
• Rationality test – rather than just considering whether the scheme is fair and which a creditor could reasonably approve, the court must carry out a horizontal comparison to investigate whether the Plan provides for different treatment of the various classes of creditors and, if so, whether those differences can be justified

Alternative options – in considering the fairness of a proposed cram down of a dissenting class of creditor, the court should ask if a fairer or better plan is available. Accordingly, the judge had erred in principle in his approach to the exercise of his discretion to sanction the Plan.

Conclusion

As Part 26A Restructuring Plans become more established as part of the restructuring toolkit, the findings of the Court of Appeal in this instance will act as useful guidance to those who are considering the same.

In particular, the Court of Appeal has:

• Emphasised that, although the cross-class cram down powers may be implemented where the statutory requirements are met, the court ultimately maintains its discretion to sanction a Part 26A Plan; and
• Offered greater clarity as to the interaction between the court’s cross-class cram down powers and the pari passu principle relating to the distribution of assets.

It is clear that future proposals of restructuring plans under Part 26A involving cross-class cram down are likely to come under greater scrutiny. Although the Court of Appeal was reluctant to set out specific criteria, the effect of the decision in practice is such that those proposing a Part 26A Restructuring Plan where cross-class cram down is needed will need to be in a position to:

• Give a strong justification for any proposed differential treatment of classes of creditors; and
• Be able to explain why the proposed plan is the preferred option, including consideration of whether there might be a better option.