How Adler will shape future restructurings

We have now had a bit of time now to digest the 23 January decision of the Court of Appeal to overturn the High Court's sanction of Adler Group's restructuring plan.

We sat down with Mark Phillips KC of South Square to get his thoughts on how this landmark decision will shape future restructurings.

Why is the decision important?

It is the first time the court of appeal has considered Restructuring Plans under 26A, and significantly, it gave Snowden LJ the opportunity to lay down guidance across a number of areas. Snowden LJ pointed out several respects in which practitioners had approached key questions incorrectly, and we need to reassess the approach to those issues. It was a watershed moment.

The decision turned on the importance of the principle of Pari Passu distribution when considering questions of fairness for a cross-class cram down. In your opinion, what is the fundamental question insolvency professionals must bear in mind on this issue when structuring future plans?

Many plans had resulted from perfectly sensible commercial deals agreed between noteholders, funds and other sophisticated parties. Hitherto the approach had been that if a deal was commercially acceptable to a large majority of stakeholders, then it should be fair.

What the Court of Appeal pointed out is that, whilst this might be the basis for a commercial agreement, it was not the basis for a cross class cram down. It was looking at plans through the wrong prism.

For the purposes of plans, fairness turns, not on commercial acceptability, but on a comparison of what the creditors in the different classes would get in the relevant alternative, and then answering whether any differences can be justified as fair. Since the relevant alternative is almost always a form of liquidation, the prism through which plans need to be looked at is the comparison with what would happen on a pari passu distribution. That means both, whether creditors are receiving the same dividend, and also whether they receive them at the same time. If one class is to be paid later, and there is a risk that the assets might not be able to bear the same dividends later, then that class is bearing a risk earlier payees are not bearing. That was what happened on the facts in Adler.

Snowden LJ made it clear that there is no prohibition against different treatment, but differences must be justifiable against the prism of fairness. That is a sea change for practitioners because that isn’t the question they’ve been addressing to date.

What other guidance can we glean from the decision?

Over recent months the issues arising on opposed applications for cross-class cram down have resulted in complex, elaborate evidence, often served last minute, and giving the Judge inadequate time to deal with the material against deadlines that appear to be engineered. Snowden LJ identified two practical requirements going forward:

1. Plan companies must make available in a timely manner the relevant material that underlies the valuations upon which it relies.

2. The parties and their advisers and experts must cooperate to focus and narrow the issues for decision so that sanction hearings are confined to manageable proportions.

Snowden LJ made the court’s position clear on the need to narrow down the issues, saying that if sensible agreement is not forthcoming, the court should exercise its power to order specific discovery and its other case management functions. The days of a dozen issues only 2 of which are really material should be over. Going forward practitioners are faced with the daunting task of identifying the material issues and limiting the hearing to those issues.

What are the practical implications you see coming about from this decision?

With clarity about the question to be considered on a cross class cram down, and the Court making clear its desire to limit the issues, there is hopefully an increased possibility that Restructuring Plans could become accessible to smaller companies. As Snowden LJ pointed out, Restructuring Plans were intended to be a “streamlined procedure.”