The Court of Appeal (CoA) has underscored the critical importance of fair value allocation in corporate restructuring plans, particularly when involving "new money" and the "cross-class cram down" mechanism under the Companies Act 2006.
Background:
The Petrofac Group, comprising Petrofac International (UAE) LLC (PIUL) and Petrofac Ltd. (PL), has served as a major international energy service provider, although a Serious Fraud Office (SFO) investigation, which began in 2017, has caused severe financial difficulties. This investigation has led to PL pleading guilty to bribery offences and paying a substantial fine. This difficulty has since been exacerbated by such external factors as the COVID-19 pandemic and the war in Ukraine, necessitating a 2021 refinancing that has failed to provide long-term stability, prompting the Group to explore further restructuring options. The resulting plans aimed to compromise liabilities across five creditor categories: senior secured funded debt, shareholder claims, director claims, PL Insurance restitutionary claims, and others pertaining to the problematic "Clean Fuels Project" in Thailand, including those from Thai Oil, Saipem, Samsung, and banks providing related guarantees.
Faced with liabilities approaching US$4bn and existential threats from an ill-fated Thai refinery project, Petrofac negotiated the plans principally with an ad-hoc group of secured lenders (AHG).
Samsung and Saipem, two consortium partners with major unsecured claims, objected. At first instance, the plans were sanctioned with the Court noting that Samsung/Saipem were no worse off with the plans and the allocation of value was fair. They appealed.
Decision:
The appeal was allowed on Ground 2, and the order sanctioning the plans was set aside. The Court confirmed that the comparison is confined to the financial value of the rights being compromised. Loss of a collateral commercial advantage, therefore, lies outside the test. Thus, Samsung and Saipem were not “worse off” for the statutory purposes of Condition A in Section 901G of the Companies Act 2006. Crucially, the Court emphasised that the test is concerned with a creditor's rights, not merely their broader "interests".
The second, and ultimately successful, ground of appeal by Saipem and Samsung centred on the fair allocation of the benefits either preserved or generated by the restructuring. The Judge erred in accepting, without evidence, that the ‘new money’ package was “competitive” and proportionate. Petrofac bore the burden of demonstrating that the price of new money matched what the restructured, virtually debt-free group could obtain in an open market.
The fixed equity allocations were negotiated before the independent established a significantly higher post-restructuring equity value for the Group. When that higher valuation emerged, the allocations were not revisited, dramatically inflating the providers’ returns.
This failure to adjust the fixed equity allocations in light of the materially higher valuation meant that the providers of new money and the AHG received a substantial and unjustified windfall, contributing to the unfair distribution of the restructuring's benefits. This disproportionate allocation was a key factor in the CoA's decision to allow the appeal on the second ground, highlighting a fundamental issue of fairness in how the value created by the restructuring was ultimately distributed among the various creditor groups.
Implications:
This case serves as a warning against rigid, pre-determined equity allocations in restructuring plans, especially when these are agreed upon before or without adequate reference to a final, robust valuation of the restructured entity. The "set it and forget it" approach to equity distribution, particularly for fees or new money, is now explicitly perilous. Restructuring advisers (financial and legal) must adopt more dynamic and flexible allocation mechanisms.
This judgement unequivocally rejects the rigid "out of the money, so get nothing" approach. It reinforces that courts will consider the equitable treatment of all affected classes, even those who would fare poorly in a liquidation. The Court's discretion under Part 26A is not a tool for "in the money" creditors to appropriate all the restructuring benefits.
The clarity provided by this judgement on the "fair allocation" principle, coupled with the rejection of the "out of the money gets nothing" stance, might embolden dissenting creditors to appeal sanction decisions whereby they perceive an unfair distribution of value.