Waldorf Production UK Plc, Re

The Plan Company sought sanction under Part 26A of the Companies Act 2006 of a restructuring plan and an order pursuant to sections 901F and 901G CA 2006 to permit a cross-class cram down of a dissenting class of Unsecured Plan Creditors (notably Capricorn and HMRC). The court found that the statutory preconditions for a cram down (Conditions A and B in section 901G) were satisfied because the Relevant Alternative was a distributing administration or liquidation and the dissenting unsecured creditors would be no worse off under the Plan than in that Relevant Alternative.

Despite satisfying Condition A, the court exercised its discretion to refuse sanction. The judge held that the Plan Company had not discharged the burden of showing the Plan was fair: the Plan had been negotiated only with the Bondholders, the 5% offer to unsecured creditors lacked credible explanation or substantiation, the Plan Company had not engaged meaningfully with HMRC and Capricorn, and critical liquidity and affordability evidence was lacking. The court treated the authorities in the Court of Appeal (in particular Re Thames Water and Re Petrofac) as requiring careful horizontal allocation of any benefits preserved or generated by a restructuring and meaningful engagement with dissenting creditors.

Background and nature of the application

• The Plan Company (Waldorf Production UK Plc) applied under Part 26A of the Companies Act 2006 for sanction of a Restructuring Plan to enable it to continue trading and pursue a solvent sale. The Plan would amend the Bond Terms and compromise unsecured liabilities (notably HMRC EPL liabilities and a claim by the M&A creditor) by providing an upfront cash payment of 5% and contingent upside-sharing rights.
• The Plan Company sought a cross-class cram down under section 901G because the Bondholders assented but the class of Unsecured Plan Creditors (Capricorn and HMRC) voted against the Plan.

Parties and procedural posture

• The Plan Company and a bonding steering committee representing most Bondholders supported the Plan; Capricorn and HMRC opposed sanction. A Convening Hearing and Convening Judgment preceded the Sanction Hearing.

Issues for decision

1. Whether the statutory preconditions for Part 26A and for cross-class cram down under section 901G were satisfied (including identification of the Relevant Alternative and whether Condition A and Condition B were met).
2. If jurisdiction existed, whether the court should in its discretion sanction the Plan — in particular whether the Plan was fair and whether benefits preserved or generated by the restructuring were allocated reasonably between creditor classes.
3. The weight to be given to lack of pre-plan engagement and negotiation with the dissenting unsecured creditors, and the sufficiency of evidence (liquidity/cashflow) to support the Plan Company’s affordability case.

Court’s reasoning and findings

• The Relevant Alternative was identified as a distributing administration or liquidation; on that comparator the unsecured creditors would be worse off absent the Plan so Condition A was satisfied and Condition B was also satisfied because an assenting class (the Bondholders) with a genuine economic interest existed.
• Notwithstanding satisfaction of Conditions A and B, the court must exercise its discretion. The court applied the contemporary authorities emphasising horizontal comparison of allocation of benefits preserved or generated by a Plan (notably Re AGPS BondCo Plc, Re Thames Water and Re Petrofac), and the requirement that plan proponents explain why the allocation between classes is fair.
• The Plan Company had not engaged meaningfully with Capricorn or HMRC in negotiating the Plan and offered no convincing evidence to explain or justify the 5% upfront payment; the Plan was effectively conceived with input only from the Bondholders. The Plan Company also failed to produce persuasive cashflow forecasts or other substantiation showing that a materially higher upfront payment was unaffordable.
• On those grounds the Plan Company failed to discharge the burden of proving the Plan was fair and that the court should exercise its discretion to sanction a cross-class cram down.

Outcome

The court refused to sanction the restructuring plan; consequential matters were adjourned and directions given for an early further hearing. The judge invited (and permitted a short period for) continued negotiations and the provision of further material, but ultimately determined that sanction should be refused on the present evidence.

Application for sanction of the Restructuring Plan is refused. Although the statutory conditions for cross-class cram down (conditions A and B in section 901G CA 2006) were satisfied because the Relevant Alternative was a distributing administration or liquidation, the Plan Company failed to discharge the burden of showing that the Plan was fair. The Plan had been developed and negotiated only with the Bondholders, the 5% offer to unsecured creditors was unexplained and insufficiently evidenced, and there had been inadequate engagement with the dissenting creditors (Capricorn and HMRC). For those reasons the court exercised its discretion to decline to sanction the Plan, and adjourned consequential matters for further directions.