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New UK restructuring tool set to jack up floundering offshore sector

Insights / 16-07-2020

The Covid-19 pandemic has brought considerable challenges, as well as potential opportunities, to the offshore sector. Offshore drilling continues to face difficulties and is expected to be the worst performing subsector of the oil sector, with rig utilisation at around 60%. Drillers with upcoming financing maturities, significant debt servicing costs or working capital requirements are in the midst of considering their restructuring options if they have not done so already. Numerous drillers have cancelled contracts and exploration plans, others have scrapped rigs, and, some analysts believe that around 25% of production capacity will need to be scrapped for lease rates to remain profitable.

Indeed, with Brent crude oil prices now around $43 a barrel, down from a high of over $68 a barrel in late December 2019 but up from a low of around $21 a barrel in late April, it has been a turbulent few months for the sector. Prices initially fell as demand in China and then Europe declined whilst Opec+ and Russia did not come to an agreement to cut production. Once that agreement did come in April and Chinese manufacturing began to rise again, prices started to recover, although the outlook remains grim for the sector given the global recessionary environment which is now expected to ensue. Notwithstanding, the current turmoil may present companies with a golden opportunity to acquire competitors, suppliers and assets at bargain prices and to consolidate their positions in markets.

The Corporate Insolvency and Governance Act 2020 (the “Act”) came into force on 26 June 2020. The Act provides for a new restructuring tool (the “Restructuring Plan) that could make the difference when it comes to both securing short-term liquidity and facilitating balance-sheet restructurings to meet refinancing requirements and provide companies with a competitive edge. The Restructuring Plan largely mirrors the much-vaunted English Scheme of Arrangement (the “Scheme”’)[1] but does have a number of additional features which will make it an even more effective restructuring tool in many circumstances.

Key features of the Restructuring Plan

The Restructuring Plan is designed to be an extremely flexible tool. The plan can implement a comprehensive range of restructuring solutions including pushing out maturity dates on financing, amend & extend transactions, debt for equity swaps, and the amendment of above-market contracts to reflect prevailing market rates. The only restriction is that the proposed plan must address a company’s actual or likely financial difficulties.

The Restructuring Plan, like the Scheme, provides for a mechanism to impose a restructuring solution on all creditors and shareholders where a restructuring proposal has the support of the requisite majority of those stakeholders. Stakeholders whose legal rights are sufficiently similar to allow them to vote together with a view to their common interest are grouped together into classes for voting purposes.

The process involves three core stages:

  1. A convening hearing at which jurisdiction and class composition are considered, and the Court orders the convening of meetings for each class affected by the restructuring plan to vote on it;
  2. The classes of stakeholders meet to vote on the restructuring plan; and
  3. A sanction hearing at which the Court considers issues of fairness and whether the statutory requirements have been fulfilled before determining whether to exercise its discretion to sanction the restructuring plan.

The Restructuring Plan’s key advantage over the Scheme of Arrangement

In contrast to the Scheme, the Restructuring Plan provides for a cross-class cram down and cram-up mechanic. This means that, subject to certain criteria set out below being met, an agreement reached with 75% by value of any class of stakeholders, such as secured lenders, unsecured lenders, trade creditors or shareholders, is sufficient for the Court to make the plan binding on any dissenting class of stakeholders. This is a major development from the Scheme, which requires 75% in value and a majority in number of stakeholders in each class (not just one) to approve the restructuring proposal in order for the Court to be able to make it binding on all stakeholders. Under the Restructuring Plan, it should, therefore, become quicker and cheaper to implement a restructuring, as it will be substantially more difficult for a class of stakeholders to hold up the restructuring process where their approval is not a pre-requisite for the plan to be sanctioned.

Further, if a class would not be expected to have any genuine economic interest in the case of the relevant alternative to the plan, their interests can be disregarded and they can be bound to the plan even though they have not voted on it. For example, if the relevant alternative is insolvent liquidation and there is not enough value in the business for company shareholders to recover any value, then they would not be required to even vote on the plan.

Dissenting stakeholder protections

A plan that has been approved by the requisite majority of stakeholders must then be sanctioned by the Court. At this stage the Court will consider whether the plan is fair and the statutory requirements have been complied with. The Court may also only sanction a restructuring plan which involves a cross-class cram down or cram up if: (i) the plan does not leave any of the dissenting classes worse off than they would be in the most likely alternative scenario if the plan were not to be sanctioned (this alternative will likely be the anticipated recoveries from an insolvent liquidation or a distressed sale); and (ii) at least 75% by value of one of the classes with a genuine economic interest in the company, or that would receive a payment in the event of that relevant alternative, have approved the restructuring plan.

Establishing jurisdiction for foreign companies to access the Restructuring Plan

Foreign companies can apply to the English courts to restructure pursuant to the Restructuring Plan process as long as they have sufficient connection to the jurisdiction of England and Wales. With regard to the Scheme of Arrangement, the case law relating to which is expected to be followed when the courts consider the Restructuring Plan, the courts have shown themselves willing to consider a range of factors when deciding whether there is sufficient connection, including whether a company has its centre of main interests, assets or an establishment in the UK. It has also become common practice to establish a sufficient connection on less substantive grounds including, for example, that the obligations being compromised are subject to English law[2] or that an English company has acceded to the relevant financing arrangements as a co-obligor[3].

Recognition of the Restructuring Plan for foreign companies

Provided it is possible to establish jurisdiction, the key question for a foreign company seeking access to the Restructuring Plan is whether the restructuring will be recognised in the necessary jurisdictions. It will be important to consider where the company is incorporated or its assets are situated, in order to ensure that the restructuring cannot be frustrated by stakeholder action in those jurisdictions. This involves an analysis of the available mechanisms for recognition in the relevant jurisdictions which will in turn often depend on the manner in which a sufficient connection was established to implement the restructuring.

As a starting point, it is generally the case that where a sufficient connection is established on the basis of English governing law, recognition will follow on the basis of the private international law principle that an amendment or discharge implemented pursuant to the law governing the obligation will be valid and recognised. However, there are a variety of means to achieve recognition depending on the relevant jurisdictions in which it is required and the nature of the sufficient connection to establish jurisdiction.

Comment

The Restructuring Plan is a flexible restructuring tool, designed to provide for pragmatic and commercial restructuring solutions which can be implemented expeditiously and maximise value for stakeholders. It will be important for foreign companies considering their restructuring options to consider the Restructuring Plan as, in many circumstances, it will likely be cheaper and quicker to implement than other international restructuring tools.

In circumstances where a company has borrowed under an English-law agreement, an English restructuring process is often a necessity as, subject to limited exceptions, the English Courts will not recognise the discharge of English-law-governed debt through foreign restructuring proceedings. The Restructuring Plan also provides for greater flexibility in crafting appropriate restructuring solutions than the US Chapter 11 restructuring procedure as it does not require support from an impaired stakeholder class or for a more senior class of impaired creditors to be satisfied in full before a more junior class can derive a benefit from the plan – the so-called US “absolute priority rule”.

Following the global financial crisis in 2008, the Scheme became the go-to restructuring tool of choice, alongside the US Chapter 11 restructuring procedure, for foreign companies to maximise value through a restructuring process. It is likely that the Restructuring Plan will pick up from where the Scheme left off and step into the breach to rescue and restructure both UK and foreign companies impacted by the pandemic. Companies that are facing actual or likely financial stress should start to consider their restructuring options early in order to preserve optionality and maximise value. Understanding the available restructuring tools is a key step in this process.

[1] Please see Ince’s previous articles on schemes of arrangement in the cases of Syncreon and Premier Oil.
[2] Re Apcoa Parking Holdings GmbH and others [2014] EWHC 1867 (Ch)

[3] Re Lecta Paper UK Ltd [2019] EWHC 3615 (Ch)

Please see our webinar for further details: Best in Class: the Updated UK Restructuring Toolkit

Alex Rogan

Alex Rogan Partner

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