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Adler’s Part 26A Restructuring Plan: A New Benchmark for Sanction on Discretionary Grounds?
Paul Sidle, Counsel, Linklaters LLP, London, UKSynopsis
The high-profile Adler decision has attracted attention for its consideration of a wide range of issues concerning valuations in the context of a dissenting creditor challenge, including a focus on the no worse-off test, court discretion and the influence of the pari passu principle, and concerns around the retention of equity by existing shareholders.
No worse-off test: When faced with competing valuations and outcomes, the court's function is not simply to choose between them. The court does not require certainty in respect of the plan company's valuation evidence or projected outcomes under the plan and in the relevant alternative. Rather, it must only be satisfied, on a balance of probabilities, that a better outcome under the plan is the most likely of the alternatives – which may be the case even if the plan company fails to persuade the court of its valuations and estimated outcomes. While subsequent case law has shown that a successful valuation challenge may be mounted without competing evidence, the decision magnifies the difficulties inherent in a contested valuation exercise. The High Court decision also suggests that a court may be prepared to sanction a plan where satisfied that a plan company will not miss the outcomes in the relevant alternative by very much, such that the court can remain satisfied that creditors will be better off under the plan.
Discretion: In largely preserving the existing temporal subordination between noteholder plan creditors, the High Court disagreed that the plan involved a departure from the pari passu principle. While the plan involved the differential treatment of noteholders who would otherwise rank equally and share pro rata in recoveries in an insolvency, it was key to the court's decision that it was likely creditors would be paid in full under the plan and that there would be no significant shortfall. But even if the plan failed, the court found on the basis of the challenging creditors' valuations that default under a new loan to value covenant would be triggered entitling noteholders to accelerate and that pari passu distribution would apply under the agreed waterfall provisions.
Equity retention: A plan which allows existing shareholders to retain equity will attract the scrutiny of the court to ensure that it is not inappropriate in the circumstances. Typically, a 'pay to play' arrangement will satisfy the court provided it is genuine. The decision underscores how in-the-money creditors will be in the driving seat provided they are taking a commercially rational approach.
Seen in the light of the subsequent decision in The Great Annual Savings Company, there appears to be a tension as to how far a court should consider possible alternative structures when assessing the allocation of the restructuring benefits and to what extent accepted scheme principles apply. That decision also provides a contrast to the position in Adler as regards the weight to be given to an in-the-money creditor group where the dissenting class is also in-the-money. The case amplifies the UK's role as an international restructuring hub.
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