Recent CVAs, Schemes and Restructuring Plans: May/June Round-Up

1. Hurricane Energy PLC: Restructuring Plan

(A) Convening Hearing

On 25 May 2021, Mr Justice Zacaroli handed down his reasoning for ordering the convening of two meetings: a meeting for the unsecured bondholders and a meeting for the shareholders, to consider Hurricane Energy PLC’s restructuring plan. Hurricane Energy PLC (Hurricane) was the operator of licences in relation to the exploration and exploitation of hydrocarbon resources. Its sole source of debt finance was $230m of unsecured bonds. The proposed restructuring plan (amongst other things) released $50m of the bonds and extended the maturity date by 2.5 years in exchange for an allotment of shares in Hurricane and an increase in the rate of interest payable on the bonds.

Some of Hurricane’s shareholders had objected to the plan, submitting that they were “highly suspicious” of the financial information provided by Hurricane, the reduction in production estimates was  “vastly exaggerated”, no proper explanation had been given for the reductions in projections and forecasts underestimated future oil prices. The shareholders had requested an adjournment so that they had time to replace some of the Board. Mr Justice Zacaroli rejected the request for a delay and noted that the shareholders’ objections were matters which would be relevant to the Court’s exercise of its discretion to sanction the plan (if properly evidenced) rather than to determining the threshold conditions for the convening meetings.

Hurricane had proposed to convene a single class meeting for all of the bondholders and had argued that a meeting for shareholders was not required as shareholders’ rights were not affected by the plan. In rejecting Hurricane’s submission, the Court found that the plan affected the rights of the shareholders to participate in Hurricane’s capital and profits since the issuance of new shares under the plan diluted the shareholders’ holdings and restricted the exercise of both their pre-emption rights and their rights relating to approval of allotments by directors.

In determining that the threshold conditions to order the convening of two meetings were satisfied, Mr Justice Zacaroli noted that:

• The threshold for Condition A (the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern) was “relatively low” and the review undertaken by consultants was enough to satisfy the Court that Hurricane is likely to encounter financial difficulties that may affect its ability to carry on business as a going concern.
• The plan was designed to mitigate the effect of Hurricane’s financial difficulties and the extension of the maturity date of the bonds would “give rise to the possibility of full repayment of the (modified) [b]onds and some measure of value in the shareholding”. This in turn provided for the possibility of a greater return to the bondholders.

(B) Sanction Hearing

On 28 June 2021, the High Court refused to exercise its discretion to cram down the dissenting class of shareholders and declined to sanction Hurricane’s restructuring plan. Although Condition B of the threshold conditions for sanctioning the plan, where one or more classes had not voted in favour of it, was satisfied, Mr Justice Zacaroli held that the “no worse off test” detailed in Condition A was not satisfied. Following Mr Justice Trower in DeepOcean, the Court considered that a broad approach was required in determining whether shareholders were “any worse off” as a result of the plan and it was necessary to take into account all incidents of their rights as shareholders.

Hurricane had argued that the relevant alternative to the plan was a controlled wind-down, in which the company would continue to trade until May 2022 and then commence a decommissioning process and wind-down, resulting in a recovery of 76.4% of the total bond debt and no return to shareholders. In rejecting this argument, the Court found that the fact that there was a realistic prospect that Hurricane would be able to trade beyond May 2022 and fund the shortfall between available cash and the amount due at the bonds’ maturity (for example by refinancing the bonds) so that it could discharge its obligations to the bondholders and leave assets with at least potential for exploitation, was enough to rebut the contention that the shareholders would be no better off under the relevant alternative than under the plan. Mr Justice Zacaroli said “to retain 100% equity in the company that is continuing to trade, with a realistic prospect of repaying the [b]onds, 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%”.

Mr Justice Zacaroli held that, even if Condition A had been satisfied, he would not have exercised his discretion to sanction the plan for the following key reasons:

• Hurricane would most likely continue trading profitably in the short to medium term and this was not a case where the relevant alternative involved any immediate insolvency process. The evidence showed that Hurricane’s critical well was likely to remain economically viable until early 2024 and there were reasonable grounds to believe that Hurricane would be able to negotiate an extension which would enable it to continue extracting oil from that well beyond July 2022.
• There was a reasonable possibility that the projected shortfall between available cash and the sum required to redeem the bonds at maturity could be bridged.
• The plan would remove, immediately and irrevocably, all but a fraction of the current shareholders’ equity. In considering whether the plan fairly allocated value between the different stakeholders, it was not sufficient to conclude that the current valuation of the future revenue streams indicated that it would be insufficient to repay the bonds in full. This would deprive the shareholders of any potential upside which could be generated from future trading combined with steps the new board might legitimately take to address the repayment of the bonds at maturity.
• If actual performance and the steps taken by the new board did not improve the financial outlook over the coming months, it was reasonable to believe that a restructuring could be undertaken at a later stage.
• The fact that the board was likely to be replaced imminently was not a good ground for urgency and there were no other sufficient grounds of urgency. The Court noted that, until a company goes into a formal insolvency process, it was the shareholders’ right to replace the board if they saw fit.

It has been reported that Hurricane would seek permission to appeal the decision.

2. ALL Scheme Limited: Scheme of Arrangement

The scheme company, ALL Scheme Limited (ALL), was part of the Amigo group of companies which offered “guarantor loans” to those unable to borrow from mainstream lenders. ALL had faced a number of complaints from customers relating to its lending activities, in particular with respect to unaffordable or unsustainable lending. Customers were entitled to seek redress for such complaints, which the Court noted was typically quantified for borrowers as the amount of the costs and interests paid on loans and for guarantors as the amount paid under a guarantee plus interest at 8%. The purpose of the scheme was to provide a mechanism for the determination of the redress claims with a six month bar date for submission of such claims, to set up a fund used to pay part of the redress claims and for the redress claims to be released. The scheme was approved at the creditors’ meeting, held on 12 May 2021.

On 24 May 2021, Mr Justice Miles handed down his judgment, in which he refused to sanction the scheme, further to the FCA’s intervention and the objections raised to the scheme. The FCA’s objections were mostly concerned with whether the scheme creditors were being treated fairly under the scheme: the scheme creditors were suffering a 90% reduction whilst the shareholders were retaining their economic interest. Some of this concern rose from the dramatic increase in the Amigo group’s share price following the announcement of the intention to promote the scheme, which the Court considered was an indicator that the market viewed the scheme as “shifting value” from the scheme creditors to the shareholders. 

The Court considered the FCA’s objections and, in refusing to sanction the scheme, found that the creditors had not been properly consulted and “lacked the necessary information or experience” to be able to assess other options available to them or to understand the reasoning behind the shareholders’ entitlement to retain their stake under the scheme, whilst they were foregoing a significant proportion of their redress claims. When making this decision, the Court also considered: the low turnout of scheme creditors at the creditors’ meeting (only 8.7% of creditors in number had attended); the scheme creditors had limited financial sophistication and literacy and lacked professional advice; there was no steering group; the scheme had not been negotiated; and there had been a failure to sufficiently inform the scheme creditors about the scheme and the realistic alternatives.

Mr Justice Miles accepted the FCA’s submission that refusal to sanction the scheme would probably not lead to imminent insolvency of the Amigo group. He noted that “the FCA expects the directors to continue to explore and promote a restructuring which fairly allocates the benefits and losses among the various stakeholders” and urged the directors “to promote a suitable restructuring”. It has been reported that ALL would not appeal this decision.

3. Nero Holdings Limited: Company Voluntary Arrangement

The CVA in respect of Nero Holdings Limited (Nero) was approved by its creditors on 30 November 2020. Nero leased 619 of the Caffè Nero stores in the UK and its CVA proposal predominantly focused on its landlords. On the night before the creditor electronic decision procedure for the proposed CVA was set to conclude, EG Group Ltd (EG) made a takeover offer to acquire 100% of the shares in Nero Group Limited, the parent company of Nero. The offer also included an enhanced return to Nero’s landlord creditors of payment of their rent arrears in full (as compared to 30p/£ being offered under the CVA). The takeover offer was rejected. Initially nine applicants challenged the approval of the CVA (the Challenge) but just one applicant, Mr Young, a Class B landlord under the CVA, had continued the Challenge. As EG had no standing to challenge the CVA itself, to enable it to potentially facilitate a takeover, EG had separately entered into a supplemental agreement with Mr Young, in which EG had agreed to pay Mr Young’s costs and an amount in excess of rent arrears owed to Mr Young if Mr Young did not withdraw from the challenge and did not accept any settlement offer made by Nero, without EG’s consent.

On 28 May 2021, Mr Justice Green dismissed Nero’s application for strike-out or summary judgment of the Challenge, which argued that Mr Young had no legitimate interest in the relief sought due to these arrangements with EG and the challenge was an abuse of process. The Court found Mr Young had a legitimate interest in the relief sought as he still had a claim for rent arrears and a possibility of having the lease restored. In addition, based on the evidence heard, Mr Young personally wanted to achieve a better position than he was in now and would have rejected a settlement offer, even if he had not entered into the supplemental agreement with EG. Mr Justice Green considered that it would not be fair to disbelieve and reject this evidence at this stage and such evidence should be cross-examined at trial, if disputed. The fact that the Challenge was being funded by a third party did not detract from Mr Young’s own intention, which was “to achieve a better deal for himself and, he thinks, for the creditors as a whole”.

A four day trial on the Challenge is scheduled at the end of July, which will likely address the duties of the directors and nominees in relation to postponing the creditor decision making procedure further to EG’s takeover offer and the electronic voting procedure (at least 67% of Nero’s creditors had voted electronically by 9am on 30 November 2020, but the modification to the CVA further to the takeover offer was only posted on Nero’s website at 8pm on 30 November 2020).

4. DTEK Energy B.V. and DTEK Finance PLC: Schemes of Arrangement

On 14 May 2021, Mr Justice Norris sanctioned the inter-conditional schemes of arrangement proposed by DTEK Energy B.V. (DTEK Energy) and DTEK Finance PLC, following unanimous approval of the schemes, by those creditors who attended and voted at the creditor meetings. On 8 June 2021, the reasons for this decision were handed down.

In sanctioning the schemes, the Court dismissed the objections to DTEK Energy’s scheme raised by scheme creditor, Gazprombank (Switzerland) Limited (Gazprombank), which neither attended nor voted at DTEK Energy’s scheme creditor meeting. Gazprombank was a lender to the DTEK group guaranteed by various DTEK entities. Its objections to the scheme were with respect to: (i) the fairness of the scheme, in the sense that Gazprombank regarded that its prospects to recover its debts were greater than the other scheme creditors, as there was no evidence to support the assertion that absent the scheme, its obligors would be unable to repay the amounts due to it; and (ii) the uncertainty as to the international effectiveness of the scheme in the EU and in Singapore, meaning that any grant of sanction would be an act in vain.

In dismissing the first objection, Mr Justice Norris found that the impact of the scheme on Gazprombank was not so materially disproportionate and different from that of other creditors that the scheme would fail the “fairness test”. The evidence did not show that Gazprombank’s obligors were insulated from the liabilities of the DTEK group nor that Gazprombank was in a significantly stronger position with respect to repayment of its loan than other DTEK Energy scheme creditors, such that the scheme would operate unfairly by requiring it to compromise recovery rights which were “materially better” than those of other creditors.

In dismissing the second objection and finding that the scheme had a reasonable prospect of having a substantial effect in EU and Singapore and would achieve a substantial purpose in the key jurisdictions in which DTEK Energy had liabilities or assets, Mr Justice Norris noted the following:

• For the purposes of testing international effectiveness, the Court was not “in entirely novel territory” due to Brexit (an argument advanced by Gazprombank), as the default position had always been that the EU Judgments Regulation would not alone be a sufficient ground upon which to assess international effectiveness and it no longer being available had not altered the landscape.
• Evidence submitted indicated that DTEK Energy’s scheme would be given effect in the EU by virtue of Rome I, which provided that the law applicable to the contract governs the ways of extinguishing obligations (including those operating against opposing creditors). This evidence was consistent with a generally accepted principle of private international law that a variation or discharge of contractual rights in accordance with the governing law of the contract would generally be given effect in other countries.
• An English court would regard a scheme as “substantially effective” if it had the scheme creditors’ “very solid support”. This goes beyond the requisite statutory approval thresholds and looks to the commitment of the scheme creditors. Here, DTEK Energy’s scheme was supported by 95% of its scheme creditors, who not only voted in favour of the scheme but also entered into lock-up agreements. The fact that Gazprombank, a creditor holding 4.17% by value of the scheme claims, did not attend and vote at the creditors’ meeting did not alter the assessment that the scheme was “substantially effective” further to the other creditors’ support.
• When assessing whether DTEK’s Energy’s scheme had a reasonable prospect of having a substantial effect, the Court was “entitled to make a properly grounded assessment of the threatened challenges to that scheme”. The Singapore tribunal (in the arbitration currently being pursued by Gazprombank in Singapore) would apply English law to the claim and under English law, a contract governed by English law could be varied or discharged by an English scheme. As DTEK Energy’s scheme contained an irrevocable discharge and release by Gazprombank of its loan in return for scheme benefits, Gazprombank would be unable to pursue a successful claim for repayment of its loan before the Singapore tribunal. The Court also noted that in any event there would be no difficulty with recognition in Singapore as Singapore had subscribed to the UNCITRAL Model Law.

If you’d like to find out more about other recent CVAs, restructuring plans and schemes, please see our updates on the Virgin Atlantic, PizzaExpress, Deep Ocean, Gategroup and Virgin Active restructuring plans, the Malaysia Airlines scheme and the New Look and Regis CVAs or get in touch with your regular contact at the firm.