Petrofac: Court of Appeal Overturns Restructuring Plans

At a Glance

The English Court of Appeal today handed down its judgment allowing the appeal against the restructuring plans of Petrofac, which the High Court approved in May.

In allowing the appeal brought by two of Petrofac’s joint venture partners, Samsung and Saipem (who are also direct competitors of Petrofac), the Court of Appeal overturned the High Court’s sanction of Petrofac’s plans.

The judgment is only the third Court of Appeal case on restructuring plans (following Adler and Thames Water) and the first to consider the “fair share” of post-restructuring benefits between senior creditors and those who would be (largely) out of the money in the relevant alternative to the plan.

The appeal was brought on two grounds:

• “No worse off” test: the judge was wrong to hold that even though Saipem and Samsung would be “worse off” under the plans, they would not be “worse off” in a way that was relevant for the purposes of the statutory “no worse off” test; and
• Fairness and discretion: the judge was wrong to sanction the plans because the benefits preserved or generated by the plans were not being fairly shared between the plan creditors.

The Court of Appeal allowed the appeal on the basis that the benefits preserved or generated by the plan were not fairly shared between the plan creditors (ground 2). It rejected the challenge based on the “no worse off” test (ground 1), although its reasoning differed from that of the High Court.

The judgment has major implications for restructuring plans going forward — in particular, regarding permissible terms of new money and fees. Going forward, where a plan involves new money that is conditional upon sanction of a restructuring plan:

• Plan companies will need to provide cogent evidence — either by way of expert evidence or by evidence of market testing — to explain why the allocation of value preserved or realized by the restructuring is a fair reflection of the cost at which funding could be obtained in the market.
• This must be by reference to the financial position of the plan company following the restructuring. It is not appropriate to rely on difficulties in obtaining funding in the very different context of obtaining funding for the pre-restructuring, insolvent company.
• It will not necessarily be a sufficient answer to say that all creditors were offered the opportunity to participate in the new money.
• Nor will it be sufficient to rely on the fact that certain senior creditors who were offered the opportunity to participate in the new money elected not to do so, absent evidence as to their reason for not doing so.
• Appeal: Petrofac may seek permission to appeal to the Supreme Court
• Costs remain to be determined.

For full details, see our deck.