The English Court of Appeal has today overturned the restructuring plan sanction order made by the High Court in April 2023.

The keenly awaited judgment raises some difficult issues for Adler in the context of its restructuring, but more broadly clarifies a number of points in relation to restructuring plans.

How the court uses its discretion to sanction a plan

As the nights draw in and the new year approaches, we take stock of the state of play for European restructuring and look ahead at potential trends for 2024.

Completion of legal reforms

Prompted by the EU Restructuring Directive and accelerated by the pandemic, jurisdictions all across Europe have completely transformed their restructuring regimes in recent years. This is part of a global trend towards more debtor-friendly, rescue-orientated restructuring regimes, inspired by US Chapter 11.

At the end of February 2023, the High Court sanctioned seven restructuring plans for companies in the Lifeways group. Lifeways is a group providing supported living and specialist residential, support and care services at properties throughout the UK.

The case raised several interesting aspects, particularly in relation to the conduct of creditor meetings for a restructuring plan where cross class cram down is sought, and whether there is a read across from scheme case law on this issue.

On 28 June 2021, the UK High Court declined to sanction Hurricane Energy Plc’s restructuring plan. This was the first time a restructuring plan seeking to achieve a debt-for-equity swap against the wishes of existing shareholders had come before the court.

Background

There has been much debate in recent years around the use made of certain UK restructuring tools – the company voluntary arrangement and, more recently, the new restructuring plan – to restructure commercial property leases. Commercial tenants argue that compromise is necessary to address high fixed costs that are no longer sustainable, but landlords have often been critical of the approach taken. This debate has become more acute in the context of the pandemic, as many High Street businesses subject to mandatory closure have built up significant rent arrears that need to be addressed.

On 12 May 2021, the High Court sanctioned Virgin Active’s Part 26A restructuring plan which had been heavily contested by certain landlords. This is the third restructuring plan to use cross-class cramdown (first used in the DeepOcean Group and subsequently in Smile Telecoms), and the first to bind dissenting landlord classes to lease compromises.

There has been much debate in recent years around the use made of certain UK restructuring tools – the company voluntary arrangement and, more recently, the new restructuring plan – to restructure commercial property leases. Commercial tenants argue that compromise is necessary to address high fixed costs that are no longer sustainable, but landlords have often been critical of the approach taken. This debate has become more acute in the context of the pandemic, as many High Street businesses subject to mandatory closure have built up significant rent arrears that need to be addressed.

The UK's latest quarterly company insolvency statistics, published on 30 April, show that insolvency rates remain significantly below pre-pandemic levels, demonstrating the continued success of Government measures in preventing a COVID-19 related wave of insolvencies.

In the US distressed market, liability management has emerged as an effective and widely accepted tool to increase liquidity, restructure debts and extend a borrower’s runway to help it avoid insolvency. However, although not unheard of, it is yet to achieve the same prevalence in Europe, where documents are still catching up to the level of flexibility seen in the US, and different capital structures and legal regimes raise different issues.