Provided by Tom Bannister (Akin Gump)
On July 1, 2025, the English Court of Appeal overturned inter-conditional English-law restructuring plans (“RPs”) proposed by Petrofac, an international energy services company. In summary, the Court of Appeal did so because the first instance judge’s assessment of the fairness of the RPs was insufficient: no evidence had been provided which would support the fairness of the RPs in relation to dissenting creditors.
This is a significant case as it is only the third time that an RP has been considered in the Court of Appeal: the first (Adler) was overturned on appeal, whilst the second (Thames) was upheld on appeal, both primarily in respect of the fairness assessment. As this is a developing area of law, we have outlined below (i) how RPs are used in restructurings (by way of reminder), (ii) the facts of Petrofac, and (iii) the general principles the Court of Appeal sought to establish in Petrofac.
RPs
At their heart, RPs are in-court restructuring tools that allow companies to amend their liabilities and obligations to creditors and shareholders outside of formal insolvency and in circumstances where it would be very difficult to achieve that consensually (for instance, if amendments relate to sacred rights that require a 90% vote or unanimity).
In an RP:
- 75% by value of creditors / shareholders can ‘cram’ a dissenting minority of creditors / shareholders who have similar rights prior to and following the RP into a compromise, subject to certain common-law safeguards. (The same is true of schemes of arrangement, of which RPs are a variation.)
- 75% by value of creditors / shareholders can ‘cram’ a dissenting class of creditors / shareholders who have different rights prior to and/or following the RP into a compromise. This is referred to as a cross-class cram down (“CCCD”).
For a CCCD to be implemented, three key conditions have to be met:
- The cramming class needs to be ‘in the money’ (“ITM”), meaning that they would receive a payment / have a genuine economic interest in whatever would happen if the RP was not sanctioned (the counterfactual to the RP, or the “Relevant Alternative”).
- The crammed creditors / shareholders cannot be worse off in the outcome of the RP than they would be in the Relevant Alternative. In other words, the RP needs to give dissenting classes at least the same economic recovery as the counterfactual would. This is referred to as the ‘no worse off’ test (“NWO Test”).
- The RP has to be fair as between the cramming class and any dissenting class. Adler established that this means that pari passu creditors cannot be treated differently under the RP unless there is good commercial justification for doing so. Thames took this one step further and made clear that the RP needs to provide for a fair allocation of the benefits of the restructuring (the “Restructuring Benefits”) as between the cramming class and the dissenting class, whether or not the dissenting class is ITM or ‘out of the money’ (“OTM”) in the Relevant Alternative. Previously, one school of thought considered that OTM creditors and shareholders would have no say in an RP as long as they received some nominal consideration because, absent the RP, they would have no economic interests to protect.
It is the CCCD mechanism (and the fairness assessment it requires) that has been the focus of most challenges to RPs, particularly in the Court of Appeal.
The Petrofac RPs
Petrofac is an energy services company that primarily works in the oil and gas space, designing, building, and operating onshore and offshore facilities. Petrofac faced financial distress starting in 2017 following investigations into bribery, corruption, and money laundering. This was exacerbated by the war in Ukraine given the concomitant effects that had on the energy markets.
Whilst Petrofac had secured some funding to support a turnaround, this was not sufficient to put the group on more stable footing, and it was therefore decided that inter-conditional RPs for the holdco and opco were required. The terms of the RPs were negotiated primarily with an AHG of senior secured creditors, who had indicated that they would be willing to provide new money to the group.
At a high level, the RPs contemplated:
- converting $909m senior secured debt into 17.5% of the group’s shares (worth $270m);
- writing down unsecured debt (including shareholder claims, director indemnification claims, claims by insurers, and claims in relation to a failed JV) in exchange for (i) nominal consideration and (ii) warrants entitling the relevant creditors and shareholders to shares in the group depending on its valuation; and
- raising $350m of New Money, of which $220m would be provided in exchange for two-thirds of the group’s shares (worth $1bn).
The deal terms were agreed based on a notional pre-restructuring equity value of the group of $351 million prior to a subsequent valuation report being prepared by independent experts (as is customary in RPs) which valued the group at between $1.5bn and $1.8bn. In addition, Petrofac’s fund-raising efforts had not sought to establish what terms third parties would require to invest in the restructured group (rather, they had been focused on an investment in the pre-restructuring distressed enterprise).
At the creditor / shareholder meetings to vote on the RPs, all voting classes approved, save for certain unsecured creditors, including Saipem and Samsung.
Saipem and Samsung held claims relating to the (failed) clean fuels JV, which had been commissioned by Thai Oil to enable increased efficiency and cleaner fuel production at a refinery in Thailand. Saipem and Samsung group entities were JV partners of Petrofac on this project and had contribution claims against Petrofac for any excess exposure to Thai Oil, as well as direct claims against Petrofac for c. $100m.
Saipem and Samsung challenged the RPs on the basis that (i) they were worse off in the RPs than in the Relevant Alternative (an insolvent liquidation) because of their position as competitors and (ii) the RPs were unfair because the creditors participating in the New Money were receiving disproportionate benefits in the restructuring relative to the unsecured creditors.
The first instance judge dismissed the challenges and found that the NWO Test had been met and that the RPs were fair in the circumstances, particularly in light of what a risky investment providing any new money to Petrofac was.
NWO Test
In the Court of Appeal, Saipem and Samsung accepted that (i) the Relevant Alternative would be a liquidation and (ii) they would be better off under the RPs than in the Relevant Alternative based on recoveries (direct economic benefits) alone.
However, Saipem and Samsung argued that the Court should have regard to indirect economic benefits that would accrue to them if Petrofac went into liquidation. They argued that, in a liquidation, they would be freed of a competitor and would make substantial profits from future business that would have otherwise been taken by Petrofac. They advanced evidence that they would assume a market position that would give them profits of approximately $340m in that scenario.
At first instance, the Court had decided that the NWO Test is undertaken solely on the basis of a creditor’s recoveries in its capacity as a creditor, not in any other capacity (e.g. as a market participant). Although the indirect benefits could be characterized as flowing to Saipem and Samsung in their capacity as creditors (due to the JV relationship) those benefits were too remote and had not been quantified holistically.
The Court of Appeal held that the NWO Test had been satisfied and rejected Saipem’s and Samsung’s arguments. In particular, the Court of Appeal said that the NWO Test looks primarily at the financial value of rights of creditors as against the Relevant Alternative. It may look at non-financial rights (if they are being compromised by the RP) but it does not look at interests.
On the facts, the loss of a competitive advantage fell outside the relationship of the RP’s compromises and the rights of Saipem and Samsung (there were not rights to compel Petrofac to cease trading in competition in the Relevant Alternative that were being compromised). Rather, the commercial competitive position of Saipem and Samsung in the Relevant Alternative was an interest, not a right.
The Court of Appeal also rejected the idea of using a ‘remoteness’ test: “An approach which focusses on the valuation of rights affected by the plan is also preferable, in our judgment, to some form of remoteness test as adopted by the judge. There is no basis in the wording of the statute for such an approach, and the judge did not explain how a concept of remoteness would be applied to decide what would fall “in” for consideration and what would fall “out””.
However, the Court of Appeal did leave open the possibility that indirect benefits could be relevant to the fairness assessment (as to which, see below).
Fairness
Saipem and Samsung argued that the RPs were unfair because the Restructuring Benefits were not being shared equally. They argued that the Restructuring Benefits were generated by the secured and unsecured claims being compromised. However, a disproportionate amount of equity in the RPs was being given to the New Money providers rather than the creditors whose claims were being compromised. It was not right to say that the disproportionate allocation was because the New Money was risky given that it would be provided to a post-restructuring, deleveraged company.
The Court of Appeal focused on two aspects of the fairness enquiry: (X) the treatment of OTM creditors and (Y) the treatment of new money providers.
OTM Creditors and Shareholders
The Court of Appeal noted that the Thames appeal judgment was narrow given that the restructuring in that case was a bridge. The Court of Appeal reiterated with approval the statements in the Thames appeal judgment that it is not sufficient to exclude OTM creditors or shareholders from the fairness assessment (and that the enquiry is therefore fact-sensitive).
This meant that the starting position in Petrofac was for the first instance judge to consider the fairness of the restructuring in respect of the dissenting classes (including Saipem and Samsung).
New Money Providers
Where new money providers put in new money outside of an RP or as independent third parties following a competitive process, then the returns to the new money providers are simply a cost of the restructuring. Similar considerations apply where the new money is being offered through the RP to existing creditors where the cost of the new money is the market rate.
Where the new money returns are provided under the terms of the RP and are “materially in excess of that which could be obtained in the market”, they fall to be considered as a benefit of the RP and in turn part of the Restructuring Benefits (and are therefore subject to a fairness assessment). The burden is on the company to show that the new money is on market terms or that it is fair on some other basis.
The Court of Appeal confirmed that the starting point for assessing the fairness of an RP is the Relevant Alternative, but it is only a starting point. Absent a scheme or an RP, any creditor wishing to avoid an insolvent liquidation and thereby preserve any value in the company on top of what it would have received as a distribution out of the estate, would need to release their debt to allow a going concern rescue. That would require unanimity of those creditors (including the OTM creditors). Schemes of arrangement allow a negotiated deal to be implemented without unanimity where it is sufficiently attractive to achieve a statutory majority in each class.
The same is not true of RPs given the CCCD power. The CCCD power exists to prevent a dissenting class exercising an unjustified right of veto, not to allow the assenting classes to “appropriate to themselves an inequitable share” of the Restructuring Benefits.
Finally, the Court of Appeal considered whether the provision of the New Money could mean that it was fair for the providers to receive an enhanced share of the Restructuring Benefits. The Court of Appeal accepted that new money providers need to be compensated at market rates. Any compensation above that is part of the Restructuring Benefits and needs to be considered from a fairness perspective.
The Restructuring Benefits in relation to the group amounted to $1.25bn (Day 1 value as a going concern minus the value in a liquidation). All creditors (secured and unsecured) contributed to the Restructuring Benefits through a write-down or write-off of their claims.
The evidence showed that:
- New Money providers of $350m would be allocated two-thirds of the equity value (c. $1bn), a 211% return on sums invested; and
- Certain senior secured creditors would receive $500m of the equity value for an investment of $187m, a 267% return on sums invested. As between return on debt and return on equity, the return on equity was significantly higher.
At first instance, the judge:
- focused on the risky nature of the transaction as justifying the New Money terms;
- focused on the fact that certain New Money providers were not existing creditors and had nothing to claim and nothing to lose;
- was impressed by Petrofac’s evidence on the marketing process; and
- noted the importance of the New Money being open to all senior secured creditors pro-rata.
The Court of Appeal considered that the first instance judge should have instead focused on the fact that the New Money would only be invested into the group on a post-restructuring basis, if the RPs were successful. In particular, Petrofac provided evidence as to the New Money terms which could be obtained based on its existing capital structure. Instead, the evidence should have shown what New Money terms could have obtained on the basis for the restructured group.
Although it was acknowledged that there was no correlation between an expert’s conclusion as to equity value and the price at which investors in the market might be willing to invest, the fact that the valuation would suggest threefold or higher returns to New Money providers could not be ignored. Accordingly, the Court of Appeal scrutinised the market testing process for the New Money terms and focused on the fact that there had been no process to identify the cost of borrowing post-restructuring.
Lazard’s sale process and potential equity raising process was considered to be irrelevant to this new money market testing requirement. The negotiations with the AHG were also considered to be irrelevant to this market testing requirement.
No evidence was provided by the senior secured creditors who did not participate in the New Money as to why they chose not to participate (which may have supported the position that the deal was in fact not ‘too good’ for anyone to pass on).
With that background, the Court of Appeal decided that the first instance judge was wrong to focus on the pre-restructuring risks and should have considered the risks on day 1 after the restructuring when considering the distribution of the Restructuring Benefits and the treatment of New Money providers.
The burden was on Petrofac to justify the returns: it had not done so and it was telling that the deal was negotiated before the valuation report was available: “It begged an obvious question, one which required cogent evidence – either by way of expert evidence or by evidence of the market having been tested – to explain why allocating the lion’s share (approximately US$1 billion on the low case) of the value preserved or realised by the restructuring (approximately US$1.25 billion, also on the low case) to the providers of New Money was a fair reflection of the cost at which funding could be obtained in the market”.
In the absence of a market testing, the first instance judge had erred in finding that the New Money terms were competitive and not disproportionate. On that basis, they were a benefit of the RPs, not a cost of them. In the circumstances, the first instance judge had not considered whether there was a fair distribution of this benefit, and had therefore erred in the exercise of the Court’s discretion.
The offer to Saipem and Samsung to participate in the New Money was no answer to these issues, as there may be “many and varied reasons why creditors are not prepared to make the further investment”. The fact that they do not participate “may well not be a reason for depriving them of a share in the benefits of the restructuring to which they would otherwise be entitled”. However, the Court of Appeal accepted that this point was not fully argued.
For these reasons, the RPs were overturned.
What is next for RPs?
Whilst the Court of Appeal has laid down key RP principles in Petrofac, it remains to be seen how they are brought to life in practice.
For one, the facts of Petrofac are quite specific, especially in terms of the deal terms having been agreed with a low valuation and not revised to reflect a (much higher) valuation when the RP was being implemented.
To add to this, the Court of Appeal’s analysis indicates that the Courts are required to undertake a fact-sensitive assessment of rights and outcomes in cases of CCCD (after all, the Court of Appeal criticised the first instance judge for arriving at a conclusion on fairness without having the requisite evidence). This inevitably means that much will ride on the company’s evidence of its process and its proposed treatment of affected creditors and/or shareholders (and how it has engaged with those parties). In fact, early signs seem to suggest that companies are already preparing ‘Restructuring Benefits’ reports which outline to the Court how they are allocating the Restructuring Benefits to their creditors.
In the meantime, it is worth noting that Petrofac is reportedly seeking permission to appeal the decision to the Supreme Court. Similarly, a challenger of the Thames RP is seeking permission to appeal to the Supreme Court on the basis that the Court of Appeal’s fairness assessment in that case was too narrow. The Supreme Court has never considered an RP. As such, it is possible that this area of law develops further with guidance from the highest court.
