The Aftermath of Adler's Appeal - Where does the Court of Appeal decision leave us?

On 23 January 2024 the Court of Appeal set aside an order of the High Court sanctioning a Part 26A restructuring plan in respect of a subsidiary company of Adler Group SA.

This is the first time that the Court of Appeal has considered the sanction of a restructuring plan, and the first time that a sanctioned plan has been retrospectively set aside. The judgment is however silent on the practical consequences of setting aside the sanction order. 

The Court of Appeal's decision, and the comments made by the judges, should be carefully considered by practitioners and directors alike when implementing restructuring plans going forward. 

Background 

• The Adler Group's plan (the Plan) was sanctioned by the High Court in April 2023.  
• The Plan sought to avoid an insolvent winding down (as governed by German law) of the Group, by introducing significant new monies, as well as by staggering the maturity date of six series of senior unsecured notes (the Notes). The Plan extended the Notes to mature between 2024 and 2029. 
• The Plan was opposed by one class of noteholders. 
• The dissenting noteholders argued that the Plan violated the pari passu principle, which allows all unsecured creditors an equal share of available assets, in proportion to the debts owed. However, the High Court judge found that as it was likely that all creditors would be paid in full under the Plan, a pari passu distribution would not be relevant.
• The High Court sanctioned the Plan and exercised its power to bind the dissenting class of noteholders, via a cross-class cramdown[1]. 
• A committee formed of the dissenting noteholders appealed the High Court's decision to sanction the Plan. The Court of Appeal held that the High Court's decision to sanction the Plan should be set aside, reversing the Plan which had already been implemented for 9 months. 
• The Court of Appeal concluded that the Plan would have resulted in a divergence from the pari passu treatment of creditors, and that there was no justification for the staggering of the maturity dates of the Notes, despite Adler's arguments that the Plan reflected the commercial expectations of the noteholders. 

Key Takeaways from the Court of Appeal Judgment 

The Court of Appeal took the opportunity, when handing down its judgment, to clarify what lower court judges must consider when deciding on whether to sanction a plan.   

The test for sanctioning restructuring plans

• The Court of Appeal confirmed that the test for sanctioning restructuring plans should follow the two-part “rationality test”, which is applied when considering whether to sanction a scheme of arrangement under Part 26 of the Companies Act. 
• The views of assenting classes should not be relied on when considering whether to impose a plan on dissenting classes. The rights of the two classes are inherently different. 
• Satisfying the "no worse off" test (demonstrating that dissenting creditors are no worse off under a contested restructuring plan than in the relevant alternative) is not enough to result in a presumption in favour of a cross-class cramdown. 
• The court should have regard to the position of the class in question as against other classes. Different treatment of certain creditors must be for good reason and properly justified.
• The court does not have power under Part 26A of the Companies Act to sanction a compulsory cancellation or transfer of shares in a plan company, or to a complete compromise of out-of-the-money creditors, for no consideration. Moving forward, plan companies will need to be aware that where a restructuring plan seeks to compromise out-of-the-money creditors and/or shareholders, something still needs to be paid to those creditors or shareholders. This is to compensate them for the extinguishing of their interests, although the court did not consider what level of consideration might be appropriate to establish that necessary “give and take”.

Guidance on the correct procedure for future restructuring plans

The Court of Appeal also offered guidance on the correct procedure to follow for restructuring plans: 

• The Court of Appeal acknowledged the pressure on the first instance judge, due to the volume of evidence prepared by the parties, together with the compressed timetable for the hearing and judgment.  Lord Justice Snowden, while recognising that in certain circumstances time pressures are unavoidable, warned that “the court’s willingness to decide cases quickly to assist companies in genuine and urgent financial difficulties must not be taken for granted or abused”.
• Lord Justice Snowden also criticised the recent trend of parties asking for matters which should be decided at the convening hearing to be left for consideration at the later sanction hearing. For example, jurisdictional matters should not, if possible, be postponed to the sanction hearing.
• Moving forward, parties proposing restructuring plans will need to act quickly and commence plan proceedings with sufficient time before any hard deadlines (such as foreseeable debt maturities), to give the court enough time to properly conduct proceedings. This includes allowing the court reasonable time to assess evidence and formulate its judgment. 
• The Court of Appeal's decision serves as a warning to any future companies seeking to implement restructuring plans on an urgent basis, as the court will now expect the parties to justify any delay in initiating the plan. 

Future Impact 

While the Court of Appeal judgment provides helpful and welcome guidance on the relevant tests to consider when sanctioning restructuring plans, and the procedure which should be followed by parties, it does not address the consequences of setting aside an already sanctioned plan. 

The Court did suggest that where an appeal was contemplated the parties should consider applying for a stay of implementation of the plan, until after permission to appeal has been determined. 

It is clear from the judgment that the pari passu principle remains paramount, and while a plan can depart from the principle for a proper reason, the Court of Appeal declined to provide an exhaustive list of criteria that might qualify for such divergence. 

It remains to be seen what will happen next for the Adler Group, which maintains its confidence that the Plan will continue. Practitioners and those in the restructuring industry will no doubt keep a keen eye out for further developments in the High Court's approach to sanctioning plans post-Adler. 

The full Court of Appeal judgment can be accessed using the following link: https://shorturl.at/FNY06 .

[1] A cross-class cram down, introduced by the Corporate Insolvency and Governance Act 2020, is the process by which a restructuring plan can be imposed on an entire class of dissenting creditors or members, if certain conditions are met.