Saipem judgment shakes up restructuring plans

Summary  

• The Court of Appeal’s decision in Saipem & Ors v Petrofac Limited ([2025] EWCA Civ 821) brings welcome good news for “out-of-the-money” creditors subject to restructuring plans under Part 26A of the Companies Act 2006.
• The decision emphasises that all creditor classes, including dissenting and out-of-the money classes, should receive a fair distribution of the benefits derived from the restructuring.
• Plan companies will now need to be prepared for greater scrutiny on the fairness of their treatment of out-of-the-money creditors and returns to new money providers.
• The decision hands a degree of negotiating power back to out-of-the-money creditors and underscores the importance of fair distribution of restructuring benefits for all creditor classes.

Case Facts

• The case concerned appeals by Saipem and Samsung (joint venture partners) (“S&S”) against the sanctioning of restructuring plans for Petrofac Limited and Petrofac International (UAE) LLC.
• The plans were principally negotiated with a group of secured creditors and aimed to compromise five classes of creditor claims and introduce significant new money investment to preserve the group as a going concern.
• The allocation of equity in the restructured group was a key feature of the plans.
• At first instance, the Judge found that the dissenting creditors (including unsecured creditors such as S&S) were not worse off under the plans and that the allocation of benefits, including the returns to new money providers, was fair in the circumstances.
• The Judge therefore exercised the court’s discretion to sanction the plans under the cross-class cram-down mechanism.
• S&S appealed on two grounds:
  1. The “No Worse Off” Test (Section 901G(3), Companies Act 2006)
     S&S argued they would be worse off under the plans when considering indirect benefits they would gain from Petrofac's liquidation, including reduced competition in the market; and
  2. Fair Allocation of Restructuring Benefits
     S&S argued the restructuring benefits were not fairly shared between creditors as the new investors would receive over two-thirds of the restructured company's equity.

Court of Appeal Decision

i. First ground of appeal: Rejected

• The Court of Appeal confirmed that the statutory test requires a comparison of the financial value of the rights a creditor would have had in the relevant alternative (liquidation) with the value of rights offered under the plan.
• Broader commercial or competitive interests, such as the removal of a market competitor, are not rights compromised by the plan and are too remote from the debtor-creditor relationship.

ii. Second ground of appeal: Allowed

• The Court must consider whether the allocation of value under the plan is fair, especially when using the cross-class cram down power to impose a plan on dissenting creditors.
• The Court found that the restructuring benefits generated by the plan were not fairly distributed between creditors, including out-of-the-money creditors, for a number of reasons:
  • The majority of the value preserved by the restructuring was allocated to the providers of new money, with existing creditors receiving a much smaller share relative to the value of their compromised claims.
  • The plan companies failed to justify this allocation as there was no adequate evidence that the terms for the new money investment reflected market rates for such funding in a cleansed, post-restructuring group. The first instance judge had therefore “erred” in finding the rates to have been “competitive”.
  • The equity allocations were set before the final valuation of the restructured group was available and were not revisited after it became clear that the group’s value was significantly higher than initially assumed.
  • The Court rejected the argument that “out of the money” creditors could be excluded from sharing in the benefits of the restructuring simply because they would receive nothing in a liquidation.
• The Court observed “the proper use of the cross-class cram down power is to enable a plan to be sanctioned against the opposition of those unreasonably holding out for a better deal”… and “was not designed as a tool to enable assenting classes to appropriate to themselves an inequitable share of the benefits of the restructuring”.

Key Takeaways for Out-of-the-Money Creditors

• Even if a plan passes the “no worse off” test (i.e., no dissenting class is worse off than it would be in the relevant alternative), the court has a broad discretion when deciding whether a plan fairly distributes benefits across all creditor classes, including those who are out-of-the-money.
• It can no longer be assumed by plan companies that giving de minimis returns to out-of-the-money creditors will satisfy the jurisdictional requirement that the plan should amount to a “compromise or arrangement”.
• Depending on the facts, a fair distribution may require a material share of the upside, not just a token gesture.
• Plan companies should expect greater scrutiny and may need to consider providing better market testing where the restructure plan involves an injection of new money.