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Scottish Court sanctions the Premier Oil Scheme of Arrangement confirming the flexibility of the scheme of arrangement to implement novel restructuring solutions

Insights / 12-05-2020 / London

Successful creditor challenges to schemes of arrangement are incredibly rare, and ARCM’s challenge to Premier Oil’s scheme [1] has not bucked this trend. This scheme raised a broad range of issues which, subject to the outcome of the appeal, have been addressed to confirm the broad, flexible scope of the scheme of arrangement to implement creative restructuring solutions in the face of opposition from minority creditor groups. We provided an overview of the scheme of arrangement process and some of the issues raised by the Premier Oil scheme in our previous bulletins [2] .  

Background to the restructuring

Premier Oil, an oil & gas group, is seeking to acquire further assets in the North Sea [3] whilst also extending the maturity of its five debt instruments from 2021 to 2023. Premier Oil contends that it will be unable to refinance its debts on their scheduled maturity date in 2021 and that the acquisitions are critical for it to increase its debt capacity and be able to refinance its debts on the extended maturity dates. Under the terms of an override agreement put in place between Premier Oil and its lenders at the time its debt maturities were previously extended in 2017, the proposal, to both extend its debt maturities and acquire the assets, requires consents from its lenders under each of its debt instruments.

ARCM, Premier Oil’s largest creditor, is not supportive of Premier Oil’s proposal and has raised various commercial concerns about the effect of the acquisitions, which would involve additional decommissioning liabilities and an increase in Premier Oil’s exposure to the gas market, on Premier Oil’s ability to refinance its debts in 2023. ARCM’s consent is required to implement the proposal under the terms of the 2017 agreement as a result of the percentage of its debt holdings under two of the debt instruments. However, Premier Oil is seeking to implement its proposal through a Scottish scheme of arrangement on the basis of grouping its lenders into two classes of creditors. This has the effect of removing ARCM’s ability to block the proposal pursuant to its contractual consent rights under the 2017 agreement. 

The Scottish Court sanctioned the scheme of arrangement on 29 April but the restructuring remains on hold pending an expedited appeal.

The Sanction hearing

In an extensive judgment approving the sanction of the scheme [4], the Scottish Court considered a wide range of issues, relating to the scope of the scheme jurisdiction, disclosure, class and fairness considerations. This judgment will assist practitioners in crafting innovative restructurings capable of implementation through a scheme of arrangement. 

Scope of the scheme jurisdiction

The scope of an arrangement that a scheme company may put to its creditors pursuant to a scheme is broad and there are few limitations provided that it involves an element of consideration, “give and take” between the parties, rather than a confiscation of rights. 
ARCM sought to challenge the scope of the scheme on a number of grounds, including that: 

  1. it goes beyond a compromise of pecuniary rights and that a creditor scheme of arrangement can do no more than re-arrange debt rights; 
  2. the scheme involves a confiscation of rights and thereby lacks the necessary “give and take” between the scheme company and its creditors; 
  3. the scheme imposed new obligations rather than compromises existing obligations as a result of extending the commitment to fund the undrawn portion of the revolving credit facility; and 
  4. the novel use of a creditor scheme to implement an acquisition.

The Court dismissed these challenges and provided robust support for a broad construal of the scheme jurisdiction. The Court was satisfied that in relation to: ground (i), the rights being compromised were ancillary to pecuniary rights and flowed from ARCM’s positon as a creditor; ground (ii), if one looked to the scheme as a whole then there was an element of “give and take; ground (iii), that extending the undrawn revolving credit facility did not impose new obligations; and ground (iv), novelty did not create a jurisdictional bar and this challenge related to the commercial merits of the scheme which was not for the Court to determine.

Disclosure

ARCM challenged the adequacy of the disclosure in the Explanatory Statement. This is the document sent to scheme creditors which explains the effect of the arrangement. The Explanatory Statement must contain sufficient information for scheme creditors to make a reasonable informed judgment on whether the proposed scheme is in their commercial interests. The Court considered the various criticisms that ARCM had regarding the disclosure but was satisfied that the disclosure in the Explanatory Statement met the required standard and that ARCM’s criticisms of the disclosure simply reflected differences of commercial judgement.

Classes

ARCM raised a number of class issues but one of its principal challenges was in regards to Premier Oil’s use of an insolvent comparator upon which to formulate the classes of creditors required to vote upon the scheme. As we highlighted in our previous bulletin, a scheme must be approved by the requisite majority of each class of its creditors. A class is formed by grouping together creditors who can consult together on the basis that they have similar rights in circumstances where the scheme is not approved – the “rights-in” analysis – and are granted similar rights under the scheme in the event it is approved – the “rights-out” analysis. Identifying the appropriate comparator is essential to perform the “rights-in” part of the analysis and an insolvency comparator generally allows for a broader class composition. 

Premier Oil’s position was that, absent the scheme, it would be unable (or, at least, would very likely be unable) to refinance its finance debts upon their maturity date, and thus it was appropriate for insolvency to be the relevant comparator regardless of whether the statutory test for insolvency had been met. The Court found that the statutory tests for cash flow insolvency had been met. Nevertheless, the Court dismissed ARCM’s assertion that a solvent comparator had to be used if the statutory tests for insolvency had not been met. 

Fairness

ARCM raised a number of challenges to the fairness of the schemes and whether the scheme was one which an intelligent and honest person, as a member of each of the classes concerned and acting in respect of his or her interest, might reasonably approve. The Court dismissed these challenges on the basis that they related to differences of commercial judgment, which the scheme creditors were better placed to determine than the Court, and the overwhelming majority of scheme creditors had done so in approving the scheme proposal at the scheme meetings. 

Concluding comments

ARCM has strong views on how Premier Oil should seek to restructure but these views are not shared by the requisite majority of Premier Oil’s other creditors who voted in favour of the scheme. 

This judgment demonstrates the flexibility of the scheme to implement a novel restructuring involving a significant acquisition with a view to ultimately providing access to sufficient liquidity to refinance upon extended maturity dates. In doing so, it has provided important guidance on the appropriateness of using an insolvency comparator in circumstances where a company may not meet the statutory test for insolvency. It has also reaffirmed the fundamental principal that the Court will be slow to differ from the judgement of the scheme creditors on the commercial merits of the proposed arrangement provided that the scheme creditors have received adequate disclosure through the Explanatory Statement to be able to consider the merits of supporting the scheme. 

Despite the successful sanction of the scheme, it remains subject to an appeal, and market conditions have significantly changed with the onset of Covid-19 and its impact on energy pricing, which could potentially impact the ability to implement the restructuring. We will continue to keep you updated with a bulletin addressing the outcome of the appeal.

[1] Schemes on the same terms and with the same scheme creditors were promulgated by both Premier Oil plc and Premier Oil UK Limited, these are referred to herein together as the scheme

[2] Another milestone in the development of the english scheme as the international restructuring tool of choice and Solvent but with something to solve premier oil proposes scheme of arrangement [move to link]

[3] Andrew-Area and Shearwater assets for US$625 million; and an additional 25% interest in the Tolmount Area for US$191 million plus contingent payments of up to US$55 million

[4] PETITION OF PREMIER OIL PLC AND PREMIER OIL UK LTD FOR SANCTION OF SCHEMES OF ARRANGEMENT [2020] ScotCS CSOH_39 (29 April 2020)

Alex Rogan

Alex Rogan Partner

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