Refusal to Sanction Restructuring Processes – Hurricane Energy, Amigo Loans

Since our webinar earlier in the year, two key judgements have provided helpful guidance on circumstances where the courts will use their unfettered discretion in the refusal to sanction restructuring processes.

Hurricane Energy provided a landmark judgment, being the first time since its introduction, that the court has pushed the refusal to sanction a restructuring plan.  The court rejected the company’s submission as to the “relevant alternative” to the restructuring plan and was unconvinced that the creditors subject to the cross class cram down would have been no worse off under the plan than the relevant alternative.  Even had such conditions been satisfied, the court was not willing to exercise its discretion to sanction the plan. 

It remains to be seen if this is a set-back for the plan which until now had always been sanctioned.  The key takeaway is that the court will carefully assess the relevant alternative and companies with a longer runway, as opposed to a “burning platform” (i.e. an imminent liquidity need or upcoming maturity), may face a heavier burden in demonstrating that a plan should be sanctioned, and certainly, where that plan contemplates the permanent compromise of dissenters’ rights.  Timing will need to finely balanced, as the court has previously shown it does not favour companies waiting until the last minute to start a process and thereby putting “a gun to the court’s head”.

Amigo Loans – the refusal to sanction the proposed scheme of arrangement, again highlighted the court’s unfettered discretion.  The court did not believe that imminent insolvency was the only alternative and other proposals should have been assessed.  

The case also highlighted the importance of disclosure when compromising creditors’ rights.  The explanatory statement was deemed to be insufficient and lacked information on the scheme and alternatives.  The level of disclosure and form of information needs to be carefully considered against the financial sophistication, or lack thereof, of the particular scheme’s creditors.  The court also criticised the lack of disclosure relating to the rationale for the terms proposed with particular focus on why the company was unable to engage with shareholders on the restructuring.

Guest post written by Mark Fine, partner at McDermott Will & Emery

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