Saipem S.P.A and others v Petrofac Limited and Another (Re Petrofac appeal)

This appeal concerned the sanction under Part 26A Companies Act 2006 of two related restructuring plans for Petrofac Limited and Petrofac International (UAE) LLC. The Court of Appeal considered (i) the scope of the statutory "no worse off" test in section 901G(3) and (ii) whether the benefits generated or preserved by the restructuring had been fairly allocated between creditor groups, in particular the return afforded to providers of "New Money" and the treatment of creditors who would be "out of the money" in the relevant alternative.

The court held that the no worse off enquiry requires a comparison between the financial value of the creditor's existing rights against the plan company in the relevant alternative and the financial value of the rights offered by the plan; where a plan compromises rights against third parties the enquiry extends to those rights. The court rejected a free-standing remoteness test and confirmed that wider commercial consequences not captured by valuation go to the court's discretion rather than to the jurisdictional gateway.

The appeal was allowed in part. The judge’s conclusion that condition A of section 901G was met was upheld (different reasoning), but the sanction was set aside because the Plan Companies failed to justify that the returns awarded to providers of New Money were market-equivalent rather than constituting a disproportionate share of the restructuring surplus. The judge had not assessed the implications of the independent valuation (Teneo) nor called sufficient evidence of market testing or expert pricing to justify allocating over two-thirds of the preserved value to New Money providers and related fees.

Background and parties: The plans sought to restructure liabilities of Petrofac Limited and Petrofac International (UAE) LLC (the Plan Companies) under Part 26A Companies Act 2006. Appellants Saipem and Samsung were creditors and joint venturers on the problematic Clean Fuels Project; respondents were the Plan Companies. The High Court (Marcus Smith J) sanctioned the plans; Saipem and Samsung appealed.

Nature of the application: Sanction of two related restructuring plans proposed to write down secured and unsecured claims and to provide US$350m of "New Money" plus an US$80m cash-back guarantee facility, with equity allocations, backstop fees and work fees to New Money providers and certain secured creditors.

Issues framed:

• Whether the section 901G(3) "no worse off" condition required account to be taken of indirect economic benefits that a creditor (Saipem/Samsung) would obtain in the liquidation (for example reduced competition and future profit), or whether the enquiry is confined to rights of creditors as creditors (and where relevant, rights against third parties that the plan compromises).
• Whether the court should refuse sanction because the distribution of the benefits of the restructuring was unfair, principally due to the allegedly disproportionate returns to New Money providers and the treatment of creditors who would be out of the money in the liquidation alternative.

Court’s reasoning and holdings:

• No worse off (section 901G(3)): the Court accepted that the enquiry focuses on the financial value of the creditor's rights which the plan seeks to compromise as compared to the relevant alternative. That enquiry extends beyond direct rights against the plan company to third-party rights where the plan compels their release, but it does not encompass general competitive advantages unconnected to enforceable rights against the plan company. The Court rejected an amorphous remoteness test and held that wider commercial consequences fall to be considered under the court's discretion rather than as part of the jurisdictional condition. On the facts, the judge was correct to conclude that condition A was satisfied.
• Fair allocation and discretion: the Court emphasised that where a plan preserves or generates value above the relevant alternative, the court must scrutinise how that benefit is allocated. New Money that truly reflects market pricing is properly regarded as a cost of restructuring; but where returns to New Money providers materially exceed market rates (or cannot be shown to be market-justified) they constitute a benefit of the restructuring and must be fairly allocated. The Plan Companies relied on a Teneo valuation that implied a large day-one equity value; the Court concluded that this raised a clear need for cogent evidence (market expert evidence or meaningful market testing) to justify why providers of New Money should receive the substantial equity allocations, work fees and backstop fees awarded. The Plan Companies failed to discharge that burden: allocations had been fixed before the independent valuation, there was no adequate market-testing or expert evidence on pricing, and the allocations resulted in providers of New Money receiving over two-thirds of the value preserved by the restructuring on the low-case valuation. That absence of justification vitiated the judge’s exercise of discretion and required the sanction to be set aside.

Procedural posture: This was an appeal from Mr Justice Marcus Smith ([2025] EWHC 1250 (Ch)). The Court of Appeal upheld the judgment on the jurisdictional "no worse off" point but allowed the appeal on discretionary fairness grounds and set aside the sanction order.

Wider implications noted: The court reiterated that Part 26A developments are fact-sensitive, the no worse off test is primarily valuation-focussed, and plan companies bear the evidential burden to demonstrate that new money returns are market-based where those returns absorb a substantial part of the restructuring surplus.

Appeal allowed in part. The Court upheld the judge’s conclusion that the s.901G(3) "no worse off" jurisdictional test is primarily concerned with the financial value of rights that the plan compromises (including relevant third-party rights) and rejected a free-standing remoteness test; but the Court set aside the sanction because the Plan Companies had not discharged the burden of showing that the very large returns allocated to New Money providers and related fees were market-justified rather than constituting a disproportionate allocation of the restructuring surplus, thereby vitiating the exercise of discretion under Part 26A.

Appeal from the High Court of Justice, Business and Property Courts of England and Wales, Insolvency and Companies List (ChD), Mr Justice Marcus Smith, [2025] EWHC 1250 (Ch). Determination by Court of Appeal (Civil Division), [2025] EWCA Civ 821.