Saipem SPA & Ors v Petrofac Ltd & Anor
Market-Tested Fairness as a Pre-Condition for New-Money Rewards under Part 26A

Introduction

This Court of Appeal decision ([2025] EWCA Civ 821) arises from an attempted cross-class cram-down of two restructuring plans (“the Plans”) promoted by Petrofac Limited (PL) and Petrofac International (UAE) LLC (PIUL) under Part 26A of the Companies Act 2006. Faced with liabilities approaching US$4 billion and existential threats from an ill-fated Thai refinery project, Petrofac negotiated the Plans principally with an ad-hoc group of secured lenders (“AHG”). The Plans hinged on:

• a US$350 million “New Money” package (half debt, half equity);
• Backstop and Work Fees payable largely in new equity to the AHG; and
• a compromise of vast unsecured claims (shareholder actions, Thai Oil arbitration, contribution claims by consortium partners Samsung and Saipem, etc.).

Samsung and Saipem, two consortium partners with major unsecured claims, objected. At first instance Marcus Smith J sanctioned the Plans, holding that:

1. Samsung/Saipem were “no worse off” (Condition A) because their monetary recovery was higher than in a liquidation even if they lost the competitive advantage of Petrofac’s demise; and
2. the allocation of value (notably the equity upside for New-Money providers) was fair.

They appealed on both grounds. The Court of Appeal (Snowden, Henderson and Asplin LJJ) rejected Ground 1 but allowed Ground 2, setting aside the sanction order.

Summary of the Judgment

Ground 1 – The “No Worse Off” Test (s 901G(3))
The Court confirmed that the comparison is confined to the financial value of the rights being compromised. Loss of a collateral commercial advantage (e.g., elimination of a competitor) lies outside the test. Samsung and Saipem therefore were not “worse off” for statutory purposes.

Ground 2 – Fair Allocation & Judicial Discretion
However, the Court ruled that:

• The judge erred in accepting, without evidence, that the New-Money package (and its 211%–267% blended return) was “competitive” and proportionate.
• Petrofac bore the burden of demonstrating that the price of New Money matched what the restructured, virtually debt-free group could obtain in an open market. It adduced neither expert nor market-testing evidence.
• The fixed equity allocations (incl. Work/Backstop Fees) were negotiated before the independent valuation (Teneo) indicated a post-restructuring equity value of US$1.5–1.85 billion; when that higher valuation emerged, the allocations were not revisited, inflating the providers’ returns dramatically.
• This unjustified windfall meant the benefits of the restructuring were not fairly shared; the Court’s discretion to cram down dissenting classes should not be exercised.

The sanction order was therefore set aside; the Court declined to re-exercise discretion on the existing record.

Analysis

A. Precedents Cited and Their Influence

• Re T&N Ltd (2005) – early articulation that a scheme should not leave creditors worse off than liquidation.
• DeepOcean [2021] – Trower J’s dictum that “any worse off” primarily concerns the financial return on compromised liabilities.
• Smile Telecom [2021] – confined the test to creditors “in their capacity as creditors”.
• Great Annual Savings [2023] – Adam Johnson J emphasised valuation of rights not wider interests.
• Adler [2024, CA]
• Thames Water [2025, CA]
• Earlier scheme cases: Lehman Brothers (Patten LJ on third-party releases) and Hawk Insurance (class constitution).

The Court synthesised these strands: the no-worse-off inquiry matches the scope of the compromise; valuation focuses on rights released, extending to third-party rights only where the plan removes them.

B. Legal Reasoning in Detail

1. Scope of “No Worse Off”

Key propositions:

• Starts and ends with the value of existing vs. new rights.
• Competitive advantages lost on debtor survival are not rights against the debtor – therefore irrelevant.
• The Court rejected a nebulous “remoteness” gloss; instead it uses an objective rights-based valuation.

2. Fair Allocation of Restructuring Surplus

Building on Adler and Thames Water, the Court reiterated that satisfying s 901G conditions is only a gateway. When using cross-class cram-down the Court must also ask:

Are the benefits preserved or generated by the plan distributed in a manner that is fair to each class, including those “out of the money” in the relevant alternative?

Here, ~US$1.25 billion of value was expected to be created yet 67.7 % of the equity went to New-Money investors for US$350 million. The Court found:

• No evidence that cheaper funding could not be sourced once the balance-sheet was cleansed.
• The New-Money terms were locked-in before the valuation uplift and never renegotiated.
• Offering Samsung/Saipem a small late-stage participation option did not cure the subsidy.

3. Burden of Proof on the Plan Company

Because the plan proponent seeks to impose terms on dissenting creditors, it must justify:

1. That New-Money pricing equals market cost—or, if higher, why the surplus allocation is fair; and
2. That out-of-the-money creditors are afforded an equitable slice of any restructuring surplus.

Petrofac failed on both counts.

C. Practical & Doctrinal Impact

1. Market Benchmark Mandate – Future plan companies must adduce expert or market evidence on funding terms. “Because the AHG demanded it” will not suffice.
2. Dynamic Re-pricing – If valuations move during negotiations, equity and fee allocations should be revisited; locking-in early valuations risks plan failure.
3. Enhanced Voice for Out-of-the-Money Creditors – Thames Water’s repudiation of Virgin Active is reinforced; they cannot be ignored merely because they rank behind secured debt.
4. Judicial Template – The judgment supplies a structured two-stage fairness test:
   (i) Is the cost of New Money aligned with market?
   (ii) Is any excess return fairly shared (or justified)?
5. Negotiation Dynamics – Ad-hoc groups must anticipate rigorous scrutiny of “sponsor-style” upside economics.

D. Complex Concepts Simplified

• Part 26A Restructuring Plan: A court-sanctioned compromise between a company and its creditors that can cram-down dissenting classes if statutory conditions (75 % in-class support and “no worse off” test) plus judicial discretion are met.
• Cross-Class Cram-Down: Power to impose the plan on an entire dissenting class once statutory gates are crossed.
• No Worse Off Test (s 901G(3)): Creditor must not be financially worse off, in respect of rights compromised, than under the relevant alternative (usually liquidation).
• New Money: Fresh capital injected post-restructuring. May be debt (New-Money Notes) or equity (New-Money Equity). Fair returns typically reflect market pricing (interest, discount, warrants) plus limited incentive fees.
• Backstop Fee: Extra reward for underwriting an equity raise, compensating the underwriter’s risk of having to take the whole issue.
• Work Fee: Payment (often equity or cash) for time spent negotiating a plan; acceptable only if proportionate to actual value added.
• Enterprise Value vs. Equity Value: Enterprise value = value of business assets; equity value = enterprise value minus net debt. Here, cleaning out debt boosted equity value dramatically.

Conclusion

The Court of Appeal’s ruling in Saipem v Petrofac cements two pivotal principles in the evolving Part 26A landscape:

1. The “no worse off” test measures the monetary value of rights compromised, not collateral commercial interests.
2. Fairness demands evidence: where a plan confers exceptional upside on New-Money providers, the proponent must demonstrate—by expert proof or market testing—that such terms represent genuine funding cost. If not, the windfall forms part of the restructuring surplus that must be equitably distributed among all affected creditors, including those out of the money.

By setting aside Petrofac’s sanction order, the Court signalled it will not rubber-stamp deals driven by dominant secured creditors absent a transparent, market-anchored justification. Restructuring professionals should expect greater evidential rigour, dynamic repricing of stakeholder economics, and closer judicial scrutiny of any attempt to shift disproportionate value to select constituents.