Factual and Procedural Background
This opinion concerns an appeal against the decision of Judge Marcus Smith sanctioning two related restructuring plans ("Plans") under Part 26A of the Companies Act 2006 for two companies: Company A and Company B (together, the "Plan Companies"). The Plan Companies, along with their subsidiaries, form the Group, a major international energy service provider operating in multiple countries. The Group encountered serious financial difficulties beginning in 2017 following investigations by the Serious Fraud Office resulting in fines and ongoing operational challenges exacerbated by global events. After a refinancing in 2021 failed to stabilize the Group long-term, the Plan Companies formulated restructuring plans in late 2024 to address their financial position.
The Plans compromise liabilities of the Plan Companies to five categories of creditors, including secured debt holders, shareholder claims, director claims, insurance restitutionary claims, and claims related to a major joint venture project ("Clean Fuels Project") that experienced significant failures and led to arbitration proceedings. The Plans allocate equity and cash recoveries to creditor classes and provide for new financing ("New Money") to support the restructured Group.
Following creditor meetings, certain classes including two dissenting joint venture creditors voted against the Plans. The appeal challenges the sanction of the Plans on two grounds: (1) the interpretation of the "no worse off" condition under section 901G(3) of the Companies Act 2006, and (2) the fairness of the allocation of benefits under the Plans, particularly regarding the providers of New Money.
Legal Issues Presented
- What is the proper interpretation of the "no worse off" condition in section 901G(3) regarding the treatment of dissenting creditors under a restructuring plan?
- Whether the benefits of the restructuring are fairly allocated among the Plan Creditors, especially concerning the returns allocated to providers of New Money.
Arguments of the Parties
Appellants' Arguments
- The judge erred in holding that the dissenting creditors were not "worse off" in a relevant sense under the Plans, failing to account for indirect economic benefits they would lose if the Group were liquidated, such as competitive advantages.
- The allocation of benefits under the Plans is unfair because the providers of New Money receive a disproportionately large share of the equity value generated by the restructuring, which was not justified by market conditions or competitive processes.
- The New Money is not high risk post-restructuring, and the terms were not subject to genuine market testing.
Respondents' Arguments
- The "no worse off" test is confined to the creditor's position in their capacity as a creditor, excluding indirect benefits unrelated to creditor rights.
- The judge correctly found that the New Money providers' returns were competitive and reflective of risk, justifying the allocation of equity.
- The dissenting creditors’ objections do not undermine the fairness of the Plan, and the opportunity offered to participate in New Money addressed concerns.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Smile Telecom Holdings Ltd [2021] EWHC 685 (Ch) |
No worse off test concerns creditors in their capacity as creditors; indirect benefits affect discretion but not jurisdiction. |
Relied upon to confirm the scope of the no worse off test excludes indirect economic benefits unrelated to creditor rights. |
| In re T&N Ltd [2005] 2 BCLC 488 |
Courts unlikely to sanction a scheme if creditors receive less than in winding-up. |
Used to explain the origin and rationale of the no worse off test. |
| Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch) |
Vertical comparator test for unfair prejudice in CVAs. |
Referenced to support the principle underlying the no worse off test. |
| Re Lehman Brothers International (Europe) [2009] EWCA Civ 1161 |
Rights affected by schemes include claims against third parties essential to the scheme. |
Applied to clarify the scope of rights considered under the no worse off test. |
| Re DeepOcean 1 UK Limited [2021] EWHC 138 (Ch) |
Primary question is financial return comparison; no worse off is a broad concept including timing and security. |
Supported the court’s approach to the valuation of creditor rights. |
| Re Great Annual Savings [2023] EWHC 1141 (Ch) |
Rejected indirect benefits such as future tax revenues as relevant to the no worse off test. |
Used to reject appellants’ argument that indirect economic benefits should be considered. |
| Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 |
Classes for voting defined by rights affected by the scheme. |
Supported focus on rights rather than interests in the statutory test. |
| Re AGPS Bondco Plc [2024] EWCA Civ 24 ("Adler") |
Fair allocation of restructuring benefits is essential in exercising the court’s discretion to impose a plan. |
Provided a framework for assessing fairness and allocation of benefits. |
| Kington S.a.r.l. v Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475 ("Thames Water") |
Clarified approach to fairness, treatment of out of the money creditors, and new money providers. |
Guided the court’s analysis on the fair distribution of benefits and treatment of dissenting creditors. |
| Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) |
Earlier authority on treatment of out of the money creditors, partially disapproved. |
Its reasoning was rejected in favor of a more nuanced approach to out of the money creditors. |
| Bluebrook Limited [2009] EWHC 2114 (Ch) |
Consideration of whether a creditor is getting "too good a deal" in scheme compromises. |
Referenced in relation to fair distribution of restructuring surplus. |
Court's Reasoning and Analysis
The court first addressed the "no worse off" condition under section 901G(3), concluding that the test requires a comparison of the financial value of a creditor’s existing rights against the plan company in the relevant alternative with the value of the new or modified rights under the plan. The scope includes rights against the plan company and, where applicable, closely connected rights against third parties essential to the compromise. However, indirect economic benefits unrelated to creditor rights, such as competitive advantages from liquidation, fall outside the test’s scope.
The appellants’ argument that the dissenting creditors should be compensated for lost competitive benefits was rejected as beyond the statutory test. The court found that the judge correctly applied the test and that the appellants failed to identify any rights lost beyond those considered.
On the second ground, the court examined the fairness of the allocation of benefits under the Plans, focusing on the substantial equity allocated to providers of New Money, which represented over two-thirds of the value preserved or generated by the restructuring. The court emphasized that new money providers should be entitled to repayment and returns reflecting market costs, but any excess return beyond market rates constitutes a benefit of the restructuring requiring justification.
The court found that the judge erred by accepting without sufficient analysis or evidence that the returns on New Money were competitive and reflective of risk. The judge failed to consider the independent valuation of the restructured Group, which implied an immediate threefold return on the New Money equity, and no credible evidence was presented to justify this premium or to demonstrate market testing of terms post-restructuring.
Evidence from the Plan Companies did not address the cost of funding in the restructured Group adequately, focusing instead on pre-restructuring risks. The court noted that the equity allocations for fees and New Money were fixed before the valuation report was available and were not revisited despite the higher valuation, resulting in disproportionate benefits to New Money providers.
Consequently, the court held that the judge’s exercise of discretion was vitiated by this material error and that the fairness of the Plans could not be upheld on the existing evidence. Other objections raised were deemed unnecessary to consider given this conclusion.
Holding and Implications
The court ALLOWED THE APPEAL ON THE SECOND GROUND and set aside the judge’s order sanctioning the Plans. The appeal on the first ground was dismissed.
The direct effect is that the Plans are no longer sanctioned, and the restructuring as approved cannot proceed on the current terms. The court did not set new precedent on the interpretation of the no worse off condition beyond reaffirming its focus on creditor rights. The decision highlights the necessity for plan companies to justify the fairness of benefit allocations, particularly returns to new money providers, with clear and cogent evidence, including market testing and expert valuation analysis.