McDermott Plan Sanctioned: Lessons for Opposing Creditors
04 March 2024
In the first restructuring plan since the Court of Appeal's landmark decision in Adler, the High Court has handed down an extraordinary judgment sanctioning McDermott's heavily contested Part 26A restructuring plan and berating the conduct of its opposing creditor. Despite this, the opposing creditor ended up with the financial compromise they asked for – not through the plan but, in part at least, because of events occurring in the parallel Dutch WHOA proceedings. This should give UK lawyers some pause for thought.
The outcome of the McDermott plan was eagerly awaited by the UK restructuring market. Not only was it aggressively contested – resulting in the original expedited timetable, which provided for a four-day sanction hearing in November 2023, being extended to allow for a six-day sanction hearing in February 2024 – but also the Court of Appeal had recently provided copious guidance in Adler on the use of the court's discretionary cross-class cram down power (for further information, see our briefing here). This led to standing room only on the observer benches at the hearing and an eagerly awaited judgment.
The judge did not keep the market waiting long – the decision was handed down with commendable speed. However, it is quite extraordinary and unlike any other sanction judgment. The judge's obvious frustration with Reficar's inability to accept the offer comes through in the judgment, and it heavily influenced how he approached his decision.
Significantly, the plan represents a number of "firsts" in Part 26A jurisprudence. It is:
Also significant was the fact that it was reportedly one of the most costly restructuring plans to date: Mr Justice Michael Green stated that he was "horrified" to find out that the plan company had spent around US$150 million on professional fees in negotiating with its secured creditors and putting forward the plan. Notwithstanding that the group comprises 300 entities across the globe; negotiations took place across three jurisdictions; and the plan was being run in parallel with two inter-conditional Dutch WHOAs, the judge recognised that this was a huge sum of money for a restructuring arrangement and costs of this magnitude could have the effect of discouraging the type of restructurings that Part 26A was intended to facilitate.
The plan was also noteworthy for the number of expert witnesses – between the plan company and the opposing creditor there were eleven in total, no doubt contributing to the professional fees bill to which the judge took such exception.
McDermott is an engineering and construction group that operates in over 54 countries across the world. Having suffered financial distress for a number of years, the group filed for Chapter 11 proceedings in January 2020, which resulted in a restructuring of its financial indebtedness (pursuant to which the group entered into new secured credit agreements) and a transfer of the equity in the group to its financial creditors.
Prior to the Chapter 11 proceedings, Reficar had commenced arbitration proceedings against various group companies (including the plan company) for breach of contract. Reficar's claims in the arbitration were expressly preserved in the Chapter 11 process, and in June 2023 (after a seven-year long arbitration) the ICC Tribunal found in Reficar's favour. Shortly afterwards, to Reficar's surprise, the group launched the restructuring plan.
In brief, the plan proposed to:
At the plan meetings, seven classes of creditors voted (comprising five classes of secured creditors and two classes of unsecured creditors). All classes of secured creditors approved the plan, whilst both classes of unsecured creditors voted against the plan.
Reficar opposed the plan on various grounds, some of which were not ultimately argued during the sanction hearing and, as a result, the judge noted that it wasn't necessary to "indulge" Reficar by dealing with every single point it originally raised in opposition. The main disputed points were:
It's clear that this is not a typical restructuring plan sanction judgment: the judge's comments provide more insight into opposition strategy and practice than the legal principles underpinning Part 26A, owing largely to the conduct of the opposing creditor.
The decision gives us some clarity on what is the jurisdictional threshold for a plan to be a "compromise or arrangement" and the answer appears to be very low – in this case 0.04% of Reficar's claim counted as a compromise. Setting the bar this low would appear to call into question whether the requirement really serves any purpose at all. It is therefore possible that we may see more on this point in future cases.
The big missed opportunity in this decision is the lack of any detailed reasoning on fairness, and in particular the circumstances in which it is appropriate for the court to sanction a restructuring plan in which the equity retain their rights while a more senior class (here an unsecured creditor) is crammed down to almost nothing. This issue is especially acute where there are common members of both the in-the-money senior creditor class on which the court relies in order to exercise the cram-down power, and the equity, whose rights are not being compromised (as there were in this case). Whilst a number of restructuring plan cases suggest that it is for the in-the-money creditors to decide how the benefits of the restructuring should be allocated, it is suggested that this should not always be the case when those in-the-money senior creditors decide to confer that benefit on themselves in their capacity as lower-ranking equity, when the out-of-the money junior class is all but wiped out. Of course, if the equity inject new money as a quid pro quo, then that is an additional factor to take into account, but that was not the case here.
Whilst the facts of this case would ordinarily have required proper consideration of this point, the conduct of the opposing creditor meant that the judge did not really need to engage with the arguments. There was some acknowledgement from Mr Justice Michael Green that "there should be some scope for making a horizontal comparison between out-of-the-money creditors and shareholders in testing the fairness, as between them, of the proposed distribution of the restructuring surplus," but in the light of how the sanction hearing unfolded, it was unnecessary for the court to delve into this more deeply.
This issue is ripe for proper consideration, which may occur in the Aggregate sanction judgment, expected to be handed down imminently.
Inga West, Counsel in the Restructuring and Special Situations team, says:
"The McDermott judgment is quite extraordinary as sanction judgments go. The biggest takeaway seems to be that the judge was really cross with the way the opposing creditor handled the parallel settlement negotiations. From a restructuring plan point of view, however, it is disappointing that we did not get a proper reasoned judgment on the fairness points – but there are lots of plans in the pipeline so hopefully we will not have to wait long."
Author: Charlotte Evans (Expertise Lawyer)
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.