Waldorf Plan Rejected: Court stresses fairness and good faith

Summary 

Bringing further good news to ‘out-of-the-money’ unsecured creditors, the High Court has refused to sanction the restructuring plan proposed by Waldorf Productions UK Plc (“WPUK”), a North Sea oil and gas producer, on fairness grounds, despite the "no worse off" test being satisfied. This decision is the first major refusal on fairness grounds since the Court of Appeal’s recent guidance in Re AGPS Bondco Plc (Adler), Re Thames Water and Re Petrofac and provides important clarification on the evidential and negotiation standards expected, especially where dissenting  out-of-the-money creditors are involved.

Plan companies that do not engage in good-faith negotiations with all stakeholders and propose a plan which does not fairly share the benefits of the restructuring, but rather offer token or de minimis payments to ‘out-of-the-money’ creditors or make offers on an arbitrary basis, run a significant risk that the Court will refuse to sanction the plan. 

The burden of proof of establishing fairness is on the plan company and the proponents of the plan; Re Petrofac (see our Law-Now on Petrofac here). 

WPUK has made clear that it intends to appeal and to apply to ‘leap-frog’ to the Supreme Court. 

Case Facts

WPUK faced severe liquidity pressures in 2024 due to the UK Energy Profits Levy (the “EPL”), a challenging debt maturity profile, withdrawal of receivables-financing and the payment of a dividend to shareholders based on flawed management accounts.

Defaults followed, prompting WPUK to propose a restructuring plan (the “Plan”) under Part 26A of the Companies Act 2006. 

The Plan, negotiated solely with a steering committee of bondholders (c. 85% of secured debt), offered a 24-month extension for US$108m of secured bonds, 5% cash plus contingent upside for unsecured creditors (HMRC and Capricorn Energy, together owed c.US$104m), and release of intra-group claims.

Bondholders, as the only “in-the-money” class, unanimously approved the Plan. The unsecured class (HMRC and Capricorn) voted 100% against.

WPUK asked the Court to sanction the Plan, which would engage the cross-class cram-down under s.901G, imposing the Plan on the dissenting creditors, HMRC and Capricorn.

HMRC and Capricorn objected, arguing the Plan failed the “no worse off” test and fairness requirements. They argued that a consensual deal in which WPUK offered at least 15-20% of their debt was realistically achievable and thus the true “relevant alternative.” 

Key Legal Issues and Reasoning

Relevant Alternative:

The Court must determine what would “most likely” occur if the Plan is not sanctioned.  WPUK argued this would be a value-destructive insolvency, leaving unsecured creditors with negligible recoveries.  The unsecured creditors countered that the lack of negotiation made this artificial, and a revised plan or settlement was more probable.  The Judge concluded, with noted reluctance, that given the bondholders stated refusal of the “out-of-the-money” creditors’ alternative proposals, a formal insolvency measure remained the “most likely” alternative outcome. Condition A ( the “no worse off” test) was therefore satisfied.

Fairness and Discretion:

Passing the “no worse off” test does not create a presumption in favour of sanction. The Court, following the recent case law, must scrutinise whether the benefits of restructuring are fairly allocated and whether the plan company engaged in genuine, good-faith negotiations with all stakeholders.

Here, the Plan was devised without any engagement with HMRC or Capricorn.  The 5% offer was arbitrary, not the product of rational bargaining or affordability analysis. Unsecured creditors were being asked to forgo c.US$104m of debt, enabling bondholders to realise substantial value on a future sale, yet received only a token uplift.

There was no evidence (such as cash-flow forecasts) to show that a higher payment (e.g., 15%) was unaffordable. The bondholders stated willingness to accept liquidation rather than improve terms was viewed as irrational and contrary to economic reality.

The Court emphasised that the cross-class cram-down power is intended to enforce a reasonable bargain where cooperative negotiations have genuinely failed, not to allow a plan company to dictate terms without engagement. Therefore, the burden of proving fairness was not discharged.

Other Factors:

The Court noted that HMRC, as an involuntary creditor and the UK tax authority, merited particular consideration. Prior management decisions, such as a US$76m dividend after the EPL’s introduction and assumption of US$30m additional secured debt, contributed to WPUK’s distress and coloured the fairness assessment, though not decisive alone.

Key Takeaways

Negotiation key to assessing fairness:

Although the Court confirmed that there is no jurisdictional requirement for pre-plan negotiations with dissenting creditors, a failure to engage in such negotiations deprives the Court of an important basis for assessing fairness.  A refusal to negotiate, therefore, increases the evidential burden on a plan company.  Plans developed solely with supportive senior creditors and presented on a “take it or leave it” basis are at significant risk of being rejected.

Fair distribution of restructuring benefits:

The Courts will scrutinise the allocation of value, ensuring that all creditor classes, especially those whose cooperation is necessary to unlock value (as was the case here) receive a fair share of the restructuring upside.  Token or de minimis payments to out-of-the-money creditors or those put forward on an arbitrary basis are unlikely to suffice.

Evidential burden on plan companies:

In addition to the issues caused by WPUK’s failure to negotiate, the Court noted that neither it nor the bondholders had put forward any liquidity or cash-flow forecast to substantiate their position that the “out-of-the-money” creditors’ proposals were unaffordable.  The 5% proposed was, therefore, considered arbitrary. The Judge also noted that he was troubled by WPUK and the bondholders’ suggestion that they would prefer the losses of an insolvency process to an increased distribution to the “out-of-the-money” creditors.

Special scrutiny for involuntary creditors:

HMRC and other involuntary creditors will receive particular attention, especially where the plan company debtor has failed to engage or has traded while knowingly not paying tax.

Directors’ conduct is relevant:

Historic transactions such as large dividends, intra-group transfers, or assumption of affiliate debt may inform the Court’s fairness assessment, even if not determinative on their own.