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How the courts have analysed the 'relevant alternative' in an English restructuring plan
- Oct 16, 2023
- Latest Journal
Demonstrating what would most likely happen if a restructuring plan were not sanctioned is an essential element for the exercise of the court's discretion to cram down the votes of dissenting creditors
Restructuring plans under Part 26A of the Companies Act 2006 (CA 2006) may provide an alternative for companies in financial distress to formal insolvency (see our previous Insight).
Where one or more classes of creditors or members has not voted in favour of the restructuring plan by the requisite majority (being 75% in value of those present and voting), the court retains the power to sanction the plan providing certain conditions are met – referred to as the "cross-class cram down".
Ensuring that the proposer of a plan has adequately demonstrated what would most likely happen if the plan is not sanctioned is an essential element for the exercise of the court's discretion to cram down the votes of dissenting creditors.
When may the cross-class cram down be exercised?
Where there is at least one dissenting class, section 901G of CA 2006 provides that this does not prevent the court from sanctioning the plan under section 901F, providing that the following conditions are met (emphasis added):
• Condition A: the court is satisfied that, if the restructuring plan were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the relevant alternative. This is often referred to as the "no worse off" test.
• Condition B: the restructuring plan has been agreed by a number representing 75% in value of those present and voting in another class who would receive a payment, or which has a genuine economic interest in the company, in the relevant alternative.
Section 901G provides that if Conditions A and B are met, the fact that the dissenting class(es) oppose the restructuring, does not prevent sanctioning of the plan. The sanction remains subject to the discretion of the court, which is considered further later in this series.
What is the relevant alternative?
The relevant alternative is pertinent to both Conditions A and B of the cross-class cram down, and is the scenario which the court considers would most likely happen in the event that the plan is not sanctioned.
The person proposing the plan is required to adduce evidence to demonstrate that the relevant alternative would most likely apply on a balance of probabilities. As restructuring plans may only be used by companies in financial distress, this typically involves a formal insolvency of the company/companies, potentially alongside an accelerated sale of parts of the business.
What if there is more than one possible alternative?
It is possible that there could be more than one potential alternative, and if there is, the court is only required to select the one it considers most likely to be the relevant alternative for the purpose of the restructuring plan.
There is no requirement that the relevant alternative would definitely occur in the event that the plan is not sanctioned (Snowden J in Virgin Active [2021] EWHC 1246).
In Prezzo [2023] EWHC 1679, there were two potential alternatives if the restructuring plan was not sanctioned, including (i) alternative 1 – the appointment of administrators followed by a pre-packaged sale of the business and assets to a connected party, or (ii) alternative 2 – the appointment of administrators followed by a sale to an unconnected third party.
The court considered that alternative 1 was the most likely option, and therefore the relevant alternative for the purpose of the cross-class cram down requirements. As such, the predicted outcome for a sale to an unconnected third party through administrators was irrelevant to the court's sanction of the plan.
What if dissenting classes disagree with the company's assessment of the relevant alternative?
Following comments made in Smile Telecoms [2022] EWHC 740 that creditors needed to "step up to the plate" if they considered the relevant alternative to be incorrect, including by seeking financial information and filing their own expert evidence as to the relevant alternative, there was some debate as to whether the relevant alternative could only be challenged through obtaining expert evidence to the contrary.
While judges are only able to assess the most likely relevant alternative on the basis of the evidence before them (Virgin Active), and while there is a general view that the plan company's directors (taking into account professional advice) are normally in the best position to identify what will happen if the plan is not sanctioned (Trower J in Re E D & F Man [2022] EWHC 687), the imbalance between access to financial data and general knowledge of the business and/or sector in which the business operates means that substantively challenging the company's view of the relevant alternative can be incredibly difficult for creditors.
More recently, there has been a focus on scrutinising the plan company's evidence to ensure that the plan company has in fact demonstrated that a certain counterfactual scenario is the most likely alternative. In Great Annual Savings Company [2023] EWHC 1141, Mr Justice Johnson considered that manifest errors, inconsistencies or matters which are not properly explained in the plan company's evidence would be taken into account when considering whether the burden on the company had been discharged.
Furthermore, in Nasmyth [2023] EWHC 1141, the court was invited to infer that the most likely alternative if the restructuring plan was not sanctioned was that a connected party would continue to fund the company (as opposed to the company's position that it would enter into administration) on the basis of, among other things:
• Facilities which had been provided to the plan company in the past.
• Anticipated additional funding shown in a cashflow forecast which appeared to be in excess of what was anticipated under the restructuring plan.
• An absence of evidence demonstrating that the connected party actually intended to place the company into administration if the plan was not sanctioned.
• Doubts held by the creditors regarding the "true intention" of the restructuring plan.
Although the judge considered that the company had discharged the burden of demonstrating that the relevant alternative was in fact an insolvent administration for other reasons, the judge did refer to the "cumulative strength" of the above arguments, despite no contrary expert evidence being filed. It should be noted that the Nasmyth plan was not sanctioned for other reasons, and the plan company did, in the end, enter into insolvent administration.
Osborne Clarke comment
The increasing volume of case law relating to restructuring plans has demonstrated that, unless there are material errors or gaps in the company's evidence, or unless sufficient evidence can be provided to otherwise cast doubt on the relevant alternative being presented, it is likely that the court's starting position will be that it has no reason to doubt the relevant alternative being presented by the company proposing the plan.
However, the case of Re E D & F Man illustrates that dissenting creditors may not be expected to adduce expert evidence to put forward an alternative counterfactual scenario in every case, and that the court will seek to carefully scrutinise the relevant alternative put forward by the plan company in each case to ensure it reflects a rational and considered view of the company's board.
This article is part of Osborne Clarke's restructuring plan series, which explores the key developments affecting restructuring plans and the developing body of case law in this area. In the next instalment, we will consider the requirements of the "no worse off" test under Condition A of the cross-class cram down.
Authors
Sam Furse - Osborne Clarke
Sam specialises in providing restructuring, insolvency, and contingency planning advice. His recent assignments have involved contentious and non-contentious matters, including those with complex cross-border issues, with a particular focus on the Financial Services, Construction, and Retail & Consumer sectors.
Douglas Hawthorn - Osborne Clarke
Douglas specialises in advising on debt restructurings, turnaround and insolvency situations, acting for private equity sponsors, financial institutions, investors, companies, directors, turnaround professionals and insolvency practitioners