It’s time for offshore jurisdictions to have cross class cram downs in the restructuring toolkit
The recent case of Re Gategreoup concerned a “plan” within the new English Part 26A of the 2006 Act, implemented by the Corporate Governance and Insolvency Act 2020, where cross-class cram downs are available. This restructuring option is not yet available offshore, but Harneys believes that it should be - by way of legislative change.
The material differences between a “scheme” and a “plan” under the 2006 Act are:
- Under Part 26, the court may sanction a scheme only if both (i) a majority in number (ii) representing 75% by value of the creditors or class of creditors (or members) approve the scheme. In contrast, under Part 26A there is no numerosity requirement: a plan may be sanctioned under section 901F provided that creditors (or members) representing 75% by value of the creditors or class of creditors (or members) approve it.
- Part 26 applies irrespective of the financial state of the company. By section 901A, however, Part 26A applies only if the following two conditions are satisfied: (a) "the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern" and "the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties mentioned in [(a)]"
- Under Part 26, a scheme consisting of more than one class of creditors (or members) may only be sanctioned if each of the classes approves the scheme by the requisite majorities. Under Part 26A, in contrast, section 901G provides that where two conditions are met, then the court may sanction the plan even if one or more classes fail to approve the plan by the requisite majority, and a dissenting class of voters cannot block the plan (a "cross-class cram-down"). The conditions are as follows:
- The court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (defined as “whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned").
- [T]he compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
In the BVI, under section 177 of the BVI Business Companies Act, there is in theory a route to cross class cram downs save that (unlike the new English legislation) it is not express, there is no specific approval threshold and would subject to wide discretion. To our knowledge it has never been used to avoid the numerosity test of a scheme, and is more commonly used for share capital reorganisations. Neither of the Cayman Islands, nor Bermuda have anything similar to the BVI provision.
Cross class cram downs have the effect of massively changing the hold out position of any creditor since resisting the implementation of a plan does not rest on simply holding greater than 25% of the value of a class of debt as with a scheme. Instead, the battleground will be based on competing valuations and whether the credible alternatives are acceptable. The offshore courts are experienced in examining valuation evidence in schemes of arrangement in any event. A plan could be imposed on one or more dissenting classes of senior creditor where approved by a class of junior creditor so long as it can establish that in the relevant alternative they would have a genuine economic interest in the company. A plan is similar in form and process to the existing offshore schemes of arrangement procedures and the offshore courts will likely benefit from well-established case law on the application of the scheme process. Undoubtedly, there will be cross border recognition issues with a plan that will have to be carefully considered.