Petrofac: English Court Approves Restructuring Plan Despite Major Challenge From JV Partners; Appeal Likely

At a Glance

The English Court today handed down its judgment approving Petrofac’s restructuring plan, in the first case to follow the Court of Appeal’s ruling in Thames Water regarding the treatment of stakeholders who are out of the money in the relevant alternative to the plan.

This was a major multiday challenge on several issues that raised some interesting elements; however, there is little new in the judgment as a matter of law.

The plan was opposed by two of Petrofac’s joint venture partners, Samsung and Saipem, who are also direct competitors of Petrofac. They are expected to seek — and obtain — permission to appeal today’s judgment.

Petrofac’s financial difficulties stemmed from a 2017 investigation by the Serious Fraud Office. Liabilities to shareholders, directors and D&O insurers relating to the SFO investigation were among the claims compromised under the plan.

The court held as follows.

• Relevant alternative: The correct relevant alternative to the plan was a disorderly liquidation, as the plan companies had contended. It was not an alternative consensual restructuring on the basis of an open settlement offer¹ by the challengers (Plan B) — principally on the basis that the group’s other creditors would not agree to the terms of such a deal.
• “No worse off” test: Indirect economic benefits for the opposing creditors in a hypothetical liquidation of Petrofac — resulting from the removal of Petrofac as their competitor — were too remote to warrant consideration under the “no worse off” test (which is required for the court to have jurisdiction to approve a plan which not every class has approved). Instead, the “real world impact” of such benefits were considered — but ultimately discounted — as a matter of the court’s discretion. 
• Discretion: The court was prepared to sanction the plan as a matter of its discretion. Differences in treatment between different classes of creditors were defensible and fair, principally based on the sizeable quantum of the new money, the liquidation comparator, the competitive nature of the return and the fact that not all secured creditors elected to inject new money.
• Appeal: The court is expected to grant the challengers permission to appeal against sanction of the plan. That appeal is expected to be heard on 2-4 June, in conjunction with an existing appeal of the convening order for the plan (for which the Court of Appeal granted permission to appeal in April). We consider that certain aspects of the judgment would benefit from clarification in the Court of Appeal.

For full details, see our deck.