CB&I UK Ltd, Re [2024] EWHC 398 (Ch) - 27 February 2024
Country
Year
2024
Summary
I have heard a six day trial, including four days of factual and expert evidence, plus two days of judicial pre-reading, in relation to the application by CB&I UK Limited (the "Plan Company") for the Court's sanction of its restructuring plan (the "Plan") under Part 26A of the Companies Act 2006 (the "CA 2006"). The Plan Company seeks to use the cross-class cram down power in s.901G of the CA 2006 because two of the seven classes of creditors did not approve the Plan at their class meetings. One of those dissenting creditors is Refinería de Cartagena S.A.S. ("Reficar"), a Colombian company, which has an interest-bearing debt against the Plan Company of approx. US$1.3 billion arising out of an ICC Arbitration Award dated 2 June 2023 and it has vigorously opposed the Plan. That debt will effectively be extinguished by the Plan and there will be a minimal amount paid to Reficar in order to pass the jurisdictional thresholds in Part 26A of the CA 2006.
At the start of the hearing I had a lot of sympathy for Reficar and the position it was in. It seemed as though the Plan Company, which is part of the McDermott Group (the "Group"), a huge international engineering, procurement and construction ("EPC") group providing services to the oil, gas and energy sector, had negotiated with its secured creditors without reference to Reficar and had agreed the Plan that would extend the maturities on the secured debt, remove Reficar's debt from the balance sheet but leave other unsecured creditors and the equity in the Group whole. This brought into sharp focus the full force of the cross-class cram down power where it is being used against an "out of the money" creditor. Reficar opposed the Plan on a number of grounds, including whether the Plan Company could satisfy the jurisdictional "no worse off" test in s.901G of the CA 2006 and whether it would be a fair exercise of discretion to sanction such a plan. I will deal with these points below.
However in extraordinary developments through the course of the trial, the state of without prejudice negotiations between the parties became apparent to me, seemingly because all parties wanted me to know that there had been such negotiations going on to resolve the dispute. There are contested chronologies going back to the summer of last year, but on 7 December 2023, the Group had made an open offer to Reficar to issue it with US$50 million of preference shares in the ultimate parent of the Group, McDermott International, Ltd ("MIL"), a Bermudian company. There was no open response from Reficar but apparently without prejudice negotiations ensued, with term sheets going backwards and forwards, but no agreement was reached before the start of the trial.
There are two parallel restructuring plans for the Group in the Netherlands (the "WHOA Plans") promulgated by two Dutch companies within the Group, McDermott International Holdings B.V. ("MIH") and Lealand Finance Company B.V. ("LFC"). The purpose of the WHOA Plans is to ensure that the Plan is binding and effective on the creditors of MIH and LFC. Both the Plan and the WHOA Plans are inter-dependent, so that there needs to be approval of both for each Plan to take effect. It is clear that under Dutch law, Reficar will have to be allocated equity in MIH in consideration for the release of its debt claim against MIH (the Plan Company and MIH are the two joint and several debtors of Reficar pursuant to the Arbitration award). A Restructuring Expert has been appointed by the Dutch Court to facilitate negotiations between the parties to reach a consensual deal. Reficar did not want equity in MIH and so the discussions both here and in the Netherlands have been about equity interests in MIL, effectively the Group as a whole. The position was reached that the Dutch Restructuring Expert formulated a proposal which involved the allocation of US$75 million of preference shares in MIL to Reficar, and these would be convertible into ordinary shares representing 19.9% of the ordinary share capital of MIL.
Building on that proposal, over the weekend during the trial on Saturday 10 February 2024, the Group, through its solicitors, Kirkland & Ellis International LLP, made an open offer along the same lines as the Restructuring Expert had recommended. This was supported by the represented secured creditors of the Group, who hold the majority of the equity in MIL. The offer was essentially what Reficar had been asking and negotiating for. Reficar itself had sought to introduce evidence of the negotiations into the proceedings via one of its witnesses on the morning of Monday 12 February 2024.
Reficar raised a query about protection from future dilution and the Group accepted that point and put forward a revised offer in the morning of 13 February 2024, the fourth day of the trial. I was informed that the board of Reficar (it is a public company, 88.49% owned by the Republic of Colombia) would meet at 8.30pm UK time that evening.
In accordance with the agreed trial timetable, at 9am on Wednesday 14 February 2024, the parties served and filed their written closing submissions. I had urged the parties to limit their written closing submissions so far as possible to matters not dealt with in the opening skeleton arguments and principally to deal with the witness evidence that had been heard and any other developments. The Plan Company's written closings were 46 pages and did largely avoid repetition with the skeleton argument. Likewise the supporting creditors' written closings. Reficar, by contrast, filed written closings of 260 pages including detailed annexes. As I will explain later, its case had changed markedly from its opening skeleton argument but it was clear that it was intending to maintain its wholesale opposition to the sanctioning of the Plan. There was however virtually no mention of the negotiations and/or any decision of its board as to whether it was going to accept the offer made by the Group, and as proposed by the Dutch Restructuring Expert. Given the time, it was impossible for the Plan Company, and me, to read and digest the written submissions before the oral closing submissions began at 10.30am on the same day.
Mr David Allison KC, leading Ms Clara Johnson, Mr Ryan Perkins and Ms Stefanie Wilkins, on behalf of the Plan Company, had most of the day for their closing submissions. He said that they had not heard whether the Reficar board had approved the deal and they were assuming that it had not. At no point during the day did anyone on Reficar's side indicate the outcome of the board meeting or whether there was a settlement that would avoid the need to complete the trial with two days of closing argument. Mr Allison KC rightly referred to this as extraordinary. Mr Daniel Bayfield KC, leading Mr Jon Colclough, on behalf of the ad-hoc group of secured creditors (the "AHG") submitted in his short closing arguments that we were in the very unusual situation of the negotiations between the parties being played out in real time before the Court, and that if the deal on the table was not accepted by Reficar, then it could not possibly succeed in its arguments on the Relevant Alternative (as defined in s.901G(4) of the CA 2006), because this was dependent on showing that a deal could easily be done between the Group, its stakeholders and Reficar following the failure of the Plan.
On the final day of the trial, Thursday 15 February 2024, there was a bizarre twist that almost completely derailed Reficar's position. Before Ms Felicity Toube KC, who was appearing together with Mr Tom Sprange KC, Mr Matthew Abraham and Mr Jamil Mustafa for Reficar, began her closing submissions, a letter had been sent by her instructing solicitors, King & Spalding International LLP, which can best be described as a holding response to the offer made on 13 February 2024. After explaining that the Reficar board has certain public law duties in Colombia requiring it to carry out due diligence on any transaction involving public funds, they said that the board had not rejected the 13 February 2024 offer but that it needed to carry out more due diligence. Two specific points were identified and they said that a further board meeting would be convened "as soon as practicable" for the purpose of addressing the outstanding due diligence issues. Needless to say the letter was met with some anger on the other side and the AHG's lawyers, Weil, Gotshal & Manges (London) LLP, expressed their displeasure in a letter sent at lunchtime in which they said that the response from Reficar was "completely unacceptable" and that it showed that the Reficar Relevant Alternative was "fanciful".
Ms Toube KC proceeded with her closing submissions, though markedly not pressing what had originally been Reficar's Relevant Alternative - a consensual deal with Reficar and a new plan - but focusing on other Relevant Alternatives that she said had emerged from the evidence of the supporting creditors. Then during the lunch adjournment a letter was received from the Dutch Restructuring Expert, who is a partner in Freshfields Bruckhaus Deringer LLP in Amsterdam, addressed to the parties but with specific authorisation for it to be disclosed to me. In the letter, the Restructuring Expert said that he would be putting forward his recommendation for a settlement between the parties in relation to the "MIH WHOA Plan" and that he would then seek the sanction of the Dutch Court. His proposal is in all material respects the same as the 13 February 2024 offer made by the Group to Reficar consisting of the grant of preferred shares in MIL, convertible into non-voting ordinary shares of 19.9% of MIL's ordinary share capital. What was made clear in the letter was that if Reficar accepted this proposal and therefore the MIH WHOA Plan, it would get the 19.9% of MIL's ordinary share capital; whereas if it did not, and continued to oppose the Plan and the MIH WHOA Plan, Reficar would instead receive a smaller shareholding of 10.9% of MIL's ordinary share capital. In other words, Reficar, as a minimum, would get 10.9% of MIL's ordinary share capital, assuming both the Plan and the MIH WHOA Plan are sanctioned; but if it agreed the deal and thereby allowed the Plan and the MIH WHOA Plan to be sanctioned without opposition, it would get 10% more, at 19.9% of the ordinary share capital. It is difficult to understand why Reficar would not agree to such a deal.
Ms Toube KC recognised the significance of this. She asked for an adjournment of the balance of her submissions to await the outcome of the MIH WHOA Plan and to wait and see what might happen in the Netherlands. However, Mr Allison KC told me that the timeline showed that the MIH WHOA Plan was due to go before the Dutch Court on 5 March 2024, with judgment expected on 12 March 2024. For reasons that will become apparent when I explain the facts in more detail, there is a crucial date on 27 March 2024 when the Group potentially becomes liable in respect of a US$2.2 billion cash collateralisation obligation and it therefore needs to know some time before then if the Plan is going to be sanctioned or not, and whether that date would be extended, as it would be under the Plan. It would also not be a good use of Court resources to adjourn, so I declined to do so. I indicated to Ms Toube KC that her client should be concentrating on accepting the deal that was on the table which is what it had wanted rather than thinking about what might tactically seem to be to its advantage.
So Ms Toube KC continued with her oral submissions, but it was obvious that both the existence of the still unaccepted offer of 19.9% of MIL's ordinary share capital and the Restructuring Expert's letter recommending the offer to the Dutch creditors and Court, with a minimum guaranteed equity of 10.9%, had pulled the rug from under her feet. She accepted that she could not argue that 19.9% of MIL's ordinary share capital was not a fair distribution to Reficar from the restructuring surplus; and she struggled to maintain that 10.9% would not also be a fair distribution. She therefore had no real argument on discretion. She concentrated on the suggested further Relevant Alternatives that she said had emerged from the evidence, but that was fairly thin material upon which to challenge the Relevant Alternative put forward by the Plan Company together with the valuation from Grant Thornton showing that Reficar was wholly out of the money.
As I write this judgment, I have heard nothing further from Reficar as to whether it has accepted the deal on the table. I therefore have to assume that it continues to oppose the Plan. I have however received a copy of the Dutch Restructuring Expert's letter dated 16 February 2024 to MIH with his recommendations in relation to the MIH WHOA Plan and the deal offered to Reficar. He has concluded that the MIH WHOA Plan is fair and reasonable to all the creditors, including Reficar and provides a materially better outcome than insolvency. Specifically in relation to Reficar he states that even if it does not accept the 19.9% of MIL's ordinary share capital, it would still be materially better off with the 10.9% than in an insolvency. Furthermore he states that if the MIH WHOA Plan succeeds, Reficar could receive approx. US$900 million. Accordingly he recommended that creditors vote in favour of the MIH WHOA Plan.
On 20 February 2024, I received a letter from Reficar's solicitors dated 19 February 2024 referring to the Restructuring Expert's letter concerning the MIH WHOA Plan. The letter informed me that Reficar's board were performing the due diligence required by Colombian law and were due to meet on Friday 23 February 2024, in time for the deadline imposed by the Restructuring Expert of 25 February 2024 for creditors to respond to the MIH WHOA Plan. The letter did not state whether Reficar would be in a position to make a decision by then as to whether it will support the MIH WHOA Plan and accept the deal recommended by the Restructuring Expert.
The situation is unfortunate and frustrating and I am not prepared to wait any longer for Reficar to make a decision one way or the other. I of course need to be satisfied from the evidence before me that there is jurisdiction to sanction the Plan, that the Plan Company has proved that it has satisfied the requisite conditions, in particular Condition A in s.901G(3) of the CA 2006 - the no worse off test - and that I should exercise my discretion in favour of the Plan. For the reasons I set out below, I am so satisfied, and I will be sanctioning the Plan.
In the light of the events described above, I consider that it is not necessary for me to indulge Reficar by dealing with every single point it sought to raise in opposition to the Plan. Most of those points have been severely undermined by its refusal to agree the deal that it has sought and by the position in the Netherlands which means that Reficar will receive either 10.9% or 19.9% of MIL's ordinary share capital depending on whether it finally agrees to accept the offer and the Plans.
This judgment will therefore be much shorter and less detailed than I would have expected after hearing a six day trial. It seems to me difficult to justify delaying the result and using Court resources to provide a long and detailed judgment where the result became obvious by the events at the end of the trial. There is a tendency for these plans under Part 26A of the CA 2006 to take up disproportionate amounts of court time and to require extensive and urgent evaluations of detailed expert evidence of the likely outcomes if the plan is or is not sanctioned. I know that the lawyers involved in preparing these restructuring plans are aware of the burden on the Court and I understand that it is important that fair consideration is allotted to each case and particular attention is applied to a plan where the cross-class cram down power is to be exercised and there is serious opposition to it. Furthermore the attraction of the English Court is obvious because of the ability to cram down dissenting classes.
A further important factor is that we have had the benefit, very recently, of Snowden LJ's comprehensive review of the law and practice to be applied in the Part 26A jurisdiction in his landmark judgment in Re AGPS Bondco plc [2024] EWCA Civ 24 ("Adler (CoA)"). A number of the issues arising in this case were dealt with by Snowden LJ and it seems to me unnecessary for a further judgment to deal in detail with those matters. I also bear in mind what Snowden LJ said in [55] to [65] of Adler (CoA) about the timing and procedure for the Court's consideration of the sanctioning of these plans.
I have one more thing to say at the outset, which has troubled me throughout. I was horrified to discover that the Plan Company has spent around US$150 million on professional fees in negotiating with its secured creditors from December 2022 and then putting forward the Plan and taking it to this hearing. That is an enormous sum of money, even taking account of the fact that it includes the costs of the supporting creditors as well. The Group actually raised US$250 million of new money while the Plan was being negotiated, but that was principally to fund the professional fees for getting the Plan through. The witness from a member of the AHG, Mr Richard Carona, said that he was deeply uncomfortable with this and I agree with his comment that there seems to be something wrong with the restructuring industry, particularly in the US, where the costs appear to be out of control. Obviously the fact that the Plan has been opposed has added to the costs, but it should have been apparent from an early stage that Reficar was not going to just accept an extinguishment of its debt. I think all I can say is that I hope there can be a better way to do these financial restructurings because costs of that magnitude could be a barrier to the sort of restructurings that Part 26A was meant to encourage.
With that introduction and explanation of the approach I propose to take, I now turn to explain some of the relevant factual background to the Plan.
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