Creditors of distressed businesses are often frustrated by shareholder-controlled boards when directors pursue strategies that appear to be designed to benefit shareholders at the creditors’ expense. In these circumstances, creditors might consider sending a letter to the board to convince the directors to pivot and adopt alternative strategies or face risk of liability for breaching fiduciary duties. The efficacy of this approach depends on many factors, including the company’s financial condition, the board’s composition and the underlying transactions at issue.
On 22 July 2022, the English High Court sanctioned Houst Limited’s (“Houst” or the “Company”) restructuring plan (the “Restructuring Plan”), which significantly, is the first time a Restructuring Plan has been used to cram down HM Revenue & Customs (“HMRC”) as preferential creditor.1
Background
This past year was marked by extraordinary deal activity. Record breaking M&A activity drove record breaking private credit activity. Private equity M&A activity was at a substantial high, with over 8,500 deals worth $2.1 trillion, a 60% increase over 2020. Not surprisingly, in this environment, defaults were at all-time lows. The Proskauer Private Credit Default tracker showed an active default rate of approximately 1% at the end of 2021, compared to 3.6% in 2020.
On 12 January 2022, the English High Court granted Smile Telecoms Holdings Limited’s (“Smile” or the “Company”) application to convene a single meeting of plan creditors (the super senior creditors) to vote on the Company’s proposed restructuring plan (the “Restructuring Plan”). It is the first plan to use section 901C(4) of the Companies Act 2006 (“CA 2006”) to exclude other classes of creditors and shareholders from voting on the Restructuring Plan on the basis that they have no genuine economic interest in the Company.
Background
Despite the Supreme Court’s rejection of a structured dismissal in 2017,[1] there is a growing trend of bankruptcy courts approving structured dismissals of chapter 11 cases following a successful sale of a debtor’s assets under Section 363 of the Bankruptcy Code.
On the 19th of August 2021, the English High Court sanctioned a Part 26A restructuring plan proposed by the administrators of Amicus Finance plc (in administration) (“Amicus”) for the company’s solvent exit from administration, enabling the company to be rescued as a going concern (the “Restructuring Plan”).
Summary
On 29 September 2021, the English High Court rejected a challenge in respect of Caff Nero's company voluntary arrangement ("CVA"), brought by a landlord on the grounds of material irregularity and unfair prejudice. The single disgruntled landlord, with the backing of the EG Group ("EG") (who were interested in acquiring Caff Nero), argued that the directors of the company and the CVA nominees breached their respective duties in refusing to adjourn or postpone the electronic voting process to vote on the CVA, after EG had submitted an eleventh-hour offer for Caff Nero.
The primary investment thesis of a private credit lender is simple — get the loan repaid at maturity. Private credit lenders do not make loans as a means to acquire their borrower’s business. There are circumstances, however, where private credit lenders must be prepared to take ownership when the borrower is distressed and there is no realistic prospect of near-term loan repayment. Becoming the owner of a borrower’s business may very well be the loan recovery option of last resort.
Our private credit clients are preparing for the next restructuring cycle and have called us about ultrafast bankruptcy cases. These chapter 11 cases have grabbed headlines because they lasted less than a day. Specifically, FullBeauty Brands and Sungard Availability Services emerged from bankruptcy in 24 hours and 19 hours, respectively. Is this a trend and which companies are best suited to zip through chapter 11?
A. Prepacks, Pre-Negotiated Cases, and Free-Falls