Petrofac - Case Update

The English Court of Appeal has overturned the High Court’s sanction of Petrofac’s restructuring plan, finding in favour of dissenting creditors Saipem and Samsung on the basis that plan benefits were not fairly allocated between creditors.

In May, we summarised the High Court’s sanction of the plan and reported that the Court of Appeal had granted permission to Saipem and Samsung to appeal the decision. The appeal was heard from 2-4 June.

Saipem and Samsung advanced two grounds of appeal, arguing that:

1. the High Court erred in its application of the “no worse off” test; and

2. the benefits of the restructuring were not fairly allocated among creditors.

The Court of Appeal rejected the first ground, holding that although Saipem and Samsung might lose the competitive advantage that would arise from Petrofac's liquidation, this was not a relevant “right” compromised by the plan and thus fell outside the scope of the statutory “no worse off” test under s.901G(3) of the Companies Act.

However, the appeal succeeded on the second ground. The Court of Appeal found that the High Court had failed to scrutinise adequately the fairness of the allocation of equity in the restructured group to new money providers—particularly the “Ad Hoc Group” of existing secured creditors and other investors. While the plan extinguished US$900 million in secured and an estimated US$3 billion in unsecured liabilities, over two-thirds of the restructured equity (valued at up to US$1 billion) was allocated to the providers of US$350 million in new money. The Court concluded that this return—over 200%—was potentially excessive and not justified by evidence, especially as the valuation of the restructured group (US$1.5–1.85 billion) far exceeded the earlier working assumptions used to calculate the equity allocation.

The Court criticised the failure to provide expert evidence on market pricing for the new financing and noted that while the Ad Hoc Group had negotiated hard for their terms, there was no demonstration that the agreed terms were fair or competitive. Furthermore, the plan was formulated before the full valuation of the business was known, and no adjustments were made afterward despite the significant increase in equity value.

Ultimately, the Court set aside the order sanctioning the plans, emphasising the need for fairness in the allocation of restructuring benefits and the importance of evidentiary rigour in justifying extraordinary returns to new money investors.

Read the decision HERE.

Professionals involved:

• Andrew Thornton KC of Erskine Chambers and Jon Colclough of South Square (instructed by Mayer Brown) for Saipem and Samsung

• David Allison KC, Henry Phillips, Ryan Perkins and Stefanie Wilkins of South Square (instructed by Linklaters) for Petrofac

• Daniel Bayfield KC and Riz Mokal of South Square (instructed by Weil, Gotshal & Manges) for the Ad Hoc Group