Adler: English Court Approves Contested Restructuring Plan

At a Glance

The English Court handed down its 164-page judgment approving Adler’s restructuring plan on Friday, 21 April, binding a dissenting class of 2029 noteholders. The plan was opposed by an ad hoc committee of 2029 noteholders (the 2029 AHG) over the course of a three-day sanction hearing, in the first fully contested valuation challenge in an English restructuring plan. 

The 2029 AHG contended that creditors’ treatment under the plan diverged from the “pari passu” treatment which creditors would receive in the liquidation alternative to the plan, in which all plan creditors would have been entitled to a pro rata share of recoveries. 

• Valuation battle: The case involved a major battle as to the future value of the Group’s property assets. 
  • The Court must be satisfied that no member of a dissenting class is any worse off under the plan than in the relevant factual alternative, which requires valuation of stakeholders’ likely recoveries in both scenarios. 
  • Ultimately, the Court preferred the evidence of the Group’s property and financial advisors. Its detailed consideration of the methodology applied by both sets of advisors will be critical reading for parties instructing valuation experts and financial advisors preparing comparator reports. 
  • The Court made specific findings as to the value of the Group’s property assets and the appropriate insolvency discount. It found (on a balance of probabilities) that the 2029 Noteholders would be repaid in full under the plan, although it accepted that this was “ambitious” given “future forecasts of property prices are inherently uncertain”. Even if the Group did not repay creditors in full, creditors would still be better off under the plan than in the relevant alternative. 
  • We anticipate further valuation disputes in future contested restructuring plan cases, involving cross-examination of competing valuation experts under a compressed timetable if necessary. It is clear that compelling valuation evidence will be required in order to mount any such challenge.
• Pari passu rule: The Court ultimately held that: 
  • the preservation of staggered maturity dates did not involve a departure from the pari passu rule, based on the Court’s finding that it was likely that all plan creditors would be repaid in full; 
  • instead, the preservation of staggered maturity dates reflected the commercial risks which the 2029 Noteholders assumed when they purchased them – though the Court found no compelling reason had been advanced to preserve the staggered maturity dates rather than harmonise them;
  • it is not the Court’s role to consider whether the plan was the “best plan” or the only fair arrangement available. Although the plan was the only one to command the support of the Group and its creditors, this was a “weak reason” to sanction it; and
  • the best judge of whether creditors were better off under the plan is the plan creditors themselves, who had voted overwhelmingly in favour of the plan. 
• Retention of 77.5% equity by existing shareholders: The Court found this the most challenging aspect of the plan, given shareholders had provided no additional funding. However, the appropriate question was whether this was so unfair that the Court should refuse to sanction the plan, which (on the evidence) would have led to insolvency proceedings in which all creditors would have been worse off. Ultimately, it was not so unfair.
• The case involved disputes as to major issues of German law, including: 
  • Issuer Substitution: the validity of the substitution of the original issuer of the German law-governed Notes (for an English newco, which proposed the plan); and
  • Partial Acceleration: the validity of a purported partial acceleration of the 2029 notes. 
• The Court held that neither of these ongoing disputes precluded it from sanctioning the plan.
• Ongoing Dispute: The 2029 AHG is seeking permission to appeal, in another first for restructuring plans; the permission hearing will be heard on 25 April. Separately, litigation is ongoing before the Frankfurt court as to the validity of the issuer substitution and certain 2029 noteholders have purported to accelerate their notes, the effect of which is disputed. Accordingly, the status of the restructuring remains uncertain.

For full details, see our detailed deck.