This case concerned the first consideration of the use of cross class cram down by the court. The case involved three subsidiary companies within the DeepOcean group that had each proposed a similar restructuring plan with their creditors. Two of the companies (DeepOcean1UK Limited and Enshore Subsea Limited) had sufficient approval for the restructuring plans, however, the third company (DeepOcean Subsea Cables Limited “DSC”) only had 64.6% of unsecured creditors voting in favour of the plan which was not sufficient to meet the statutory majority of 75% required. The three restructuring plans were inter conditional and therefore all three plans needed approval.
The Corporate Insolvency and Governance Act 2020 introduced a new restructuring mechanism under Part 26A of the Companies Act 2006 (CA2006) known as the restructuring plan. One of the restructuring plan’s notable features is the ‘cross class cram down’ which can bind dissenting creditors to the plan, if satisfied that:
- none of the members of the dissenting class would be any worse off than they would be if the plan were not sanctioned (comparing it with what is likely to happen to the company otherwise) (the Relevant Alternative Test); and
- the plan has been approved by at least one 75% of one class that would have a genuine economic interest if the plan were not sanctioned (the Economic Interest Test).
- the court considers it is fair and equitable.
The court was asked to sanction the restructuring plan for DSC using the cross class cram down provisions.
The court concluded that the conditions had been met and as a result sanctioned the restructuring plan, cramming down the dissenting creditors. The tests were applied as follows:.
Relevant Alternative Test
Section 901G(4) CA2006 states that the relevant alternative is “whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned.
In considering this test the court considered the appropriate comparator test in scheme of arrangement authorities to be a similar exercise and considered that the relevant alternative would be the administration or liquidation of the three subsidiaries. Trower J, commented that although comparing likely dividends would be a good starting point for the comparison of relevant alternatives, the concept of “no worse off” in the test was a broad concept indicating that the court may consider the impact on all aspects of the liability to creditors more generally.
Economic Interest Test
In relation to the second requirement of the approval of one other class of creditors, the secured creditors of DSC had approved the plan unanimously, they would have received a payment (albeit a small one) in the event of the insolvency of DSC and therefore had a genuine economic interest in the company for the purposes of approving the plan.
Was the plan just and equitable?
A key point from this decision was made in relation to the requirement for the plan to be just and equitable such that the court ought to sanction the plan. Trower J suggested that the following points were important factors to take into account when deciding whether or not to allow the cram down of one class of creditors:
- the treatment of creditors of dissenting classes;
- the level of support for the plan;
- whether the dissenting creditors were fairly represented;
- if there were low representation from that class, what the reasons were for that; and
- whether there is the existence of a collateral interest, for example, if creditors have not acted honestly or in a way that is not just and equitable.
This was a relatively straightforward case for the court to consider as it had two other companies with similar creditors that were being offered the same deal. Although the court has absolute discretion in relation to approving a restructuring plan, the fact that the third company had such a high percentage of creditors voting in favour was a helpful factor in its decision making. Further, members of the dissenting class did not appear at the hearing to object or explain why they had not voted in favour of the restructuring plan. Had they set out their argument, their views would have been taken into consideration and the outcome may have been different.
The decision is helpful to demonstrate the issues that arise in a cross class cram down and comfort will be drawn from the reliance on equivalent scheme of arrangement tests that will give debtors confidence in utilising a restructuring plan as a tool for restructure.