DeepOcean Restructuring - the first UK Cross-Class Cram Down
The Corporate Insolvency and Governance Act 2020 (CIGA 2020), which came into force on 26 June 2020 as a response to the COVID-19 pandemic, inserted Part 26A into the Companies Act 2006 (CA 2006) to introduce a new restructuring process available to companies that have encountered, or are likely to encounter, financial difficulties affecting their ability to carry on their business as a going concern. Part 26A allows a court to sanction a compromise or arrangement in the form of a restructuring plan proposed between the company and its creditors or shareholders to eliminate, mitigate or prevent these financial difficulties.
On 13 January 2021, the High Court sanctioned three restructuring plans for three subsidiaries of DeepOcean Group Holding BV, despite one of the plans not being approved by the requisite majority of creditors. The Court exercised the cross-class cram down (CCCD) mechanism which allows the court to impose a restructuring plan on an entire class of dissenting creditors or shareholders. The DeepOcean case was the third time that a restructuring plan has been sanctioned in the UK under Part 26A, and the first time that the CCCD mechanism was used.
Following a period of financial difficulty resulting from the poor performance of three of its subsidiaries, the DeepOcean group proposed restructuring plans for these subsidiaries.
The CA 2006 provides that at least 75% in value of the creditors or shareholders present and voting at the meeting must vote in favour of the restructuring plan for the court to sanction it. The restructuring plans for two of the subsidiaries were approved by the required 75% majority. However, despite all of the secured creditors approving the third restructuring plan, only 64.6% of unsecured creditors voted in favour of it. Therefore, the third restructuring plan did not meet the statutory threshold for court approval.
However, the CA 2006 goes on to say that the court may sanction a restructuring plan that has not been approved by the requisite 75% of creditors if two conditions are met. This is called a cross-class cram down and the two conditions are:
The court must be satisfied that, if the restructuring plan was sanctioned, none of the dissenting class would be any worse off than they would be in the event most likely to occur if the plan was not sanctioned.
The restructuring plan must be approved by at least 75% in value of a class of creditors or shareholders present and voting at the meeting who would receive a payment, or have a genuine economic interest in the company. In the DeepOcean case, the restructuring plan had been approved by the secured creditors.
The High Court concluded that both conditions had been met in the DeepOcean case and accordingly exercised its absolute discretion to sanction the restructuring plan.
The judgement in DeepOcean provides useful guidance on the requirements that must be met under Part 26A of the CA 2006 for a restructuring plan to be sanctioned and whether the court will exercise its discretion in sanctioning a plan using the CCCD mechanism.
For more information on business restructuring or the effect Part 26A of the CA 2006 may have on your plans to restructure, contact our Founder Partner and corporate restructuring expert Joss Alcraft.