Thames Water - Case Update

The Court of Appeal has released its reasons for upholding Thames Water’s Part 26A restructuring plan, with one modification to the release clause.

In February, the High Court sanctioned the Part 26A restructuring plan proposed by Thames Water Utilities Holdings (the “plan company”), and rejected the alternative plan proposed by Class B Creditors. The plan involves the extension of debt maturities, a cash injection of £1.5 billion, and an additional £1.5 billion available under an "accordion" facility if certain conditions are satisfied. The plan, however, has only a limited purpose — to provide a stable platform, or “bridge”, as an interim measure to enable a further restructuring plan based on an equity raise to be implemented, hopefully within a period of six months.

However, the Court granted permission to appeal the decision to the Class B Creditors, Thames Water Limited (“TWL”) — the parent of the plan company — and Liberal Democrat MP Charlie Maynard, stating that the Court of Appeal should have the opportunity to scrutinise the decision given the public interest in the case.

In mid-March, the Court of Appeal upheld the restructuring plan, but did not release its reasons until a month later. The reasons shed light on the arguments made by the appellants, and the Court of Appeal’s reasons for ultimately rejecting them.

The Class B Creditors objected to the “Class A Control Terms,” particularly the “June Release Condition” (“JRC”) and enhanced information rights for Class A Creditors, which they argued gave Class A Creditors unfair influence over the future restructuring plan.

TWL and Mr Maynard argued that the costs of the plan were excessive, and it would be better to initiate a government-supported special administration regime (“SAR”) which prioritises public interest and uninterrupted water supply.

All three appellants challenged the scope of releases granted under the plan, particularly broad releases in favour of directors and advisers of the plan company and Thames Water Utilities Ltd (“TWUL”). The Class B Creditors submitted that the judge failed to appreciate that the plan was an interim plan and that this was important, because if there is no further restructuring plan and the plan company goes into administration and TWUL goes into a SAR, then the release would deprive the administrator of the plan company or the special administrator of TWUL from bringing claims against the directors and advisers.

The Court of Appeal found that the restructuring plan, though imperfect, was not unfair. It rejected the claim that the plan unfairly privileged Class A Creditors. While the Class A Control Terms gave certain procedural rights, the Court found these were not materially different from rights they already held under the finance documents and did not allow Class A Creditors to extract unfair value.

The Court of Appeal emphasised that even an interim plan could preserve or generate restructuring benefits. Here, the benefit was preserving value and maintaining TWUL’s viability while the future restructuring plan is developed. Because both Class A and B creditors contributed to this outcome by deferring maturities, the Court found their differential treatment under the plan justifiable.

Although the plan imposed high costs, the Court of Appeal accepted the High Court’s finding that these costs were not higher than the negative financial impact of a SAR. Importantly, the regulators (Ofwat and the Secretary of State) did not oppose the plan, which the Court took as a strong indication that it was not against the public interest.

The Court did, however, require a modification to the release clause. It ordered a carve-out to allow future claims by a special administrator or insolvency office-holder if the restructuring failed. This addressed concerns that the releases might improperly block recovery actions in a future insolvency.

Read the decision HERE.

Professionals involved:

• Tom Smith KC, Charlotte Cooke and Andrew Shaw of South Square (instructed by Linklaters) for the plan company

• Adam Al-Attar KC and Edoardo Lupi of South Square (instructed by Akin Gump) for an ad hoc group of Class A supporting creditors

• Tony Singla KC and Charlotte Thomas of Brick Court Chambers and Mark Phillips KC, Jamil Mustafa, Imogen Beltrami and Matthew Abraham of South Square (instructed by Quinn Emanuel Urquhart & Sullivan) for an ad hoc group of Class B opposing creditors

• Stephen Robins KC of South Square (instructed by Allen Overy) for a group of bank supporting creditors

• Andrew Thornton KC of Erskine Chambers and Georgina Peters of South Square (instructed by Freshfields) for Thames Water Limited

• William Day and Lucas Jones of 3VB and Niamh Davis of XXIV Old Buildings and Dr Riz Mokal and Rabin Kok of South Square (instructed pro bono by Marriott Harrison) for Charlie Maynard MP