The Latest on Insolvent Schemes and Restructuring Plans

This update summarises the latest jurisprudence on insolvent schemes of arrangement (schemes) and restructuring plans (RPs), and provides an overview of the key themes that are emerging in this area.

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Key Concepts and Notes

• Absolute priority rule – U.S. Bankruptcy Law principle which prevents junior creditors from being paid before all senior creditors have been paid in full.
• Burning platform – when a company can prove that its insolvency is imminent and unavoidable.
• Cross-class cram-down – feature of RPs which causes dissenting creditors or members to be bound to a RP, provided that the “no worse off test” is satisfied.
• DIP financing – ‘super priority’ lending provided to finance a debtor’s operations during a U.S. Chapter 11 bankruptcy case.
• Low turnout of creditors – does not automatically mean that a scheme will not be sanctioned. It is relevant to the court’s fairness assessment whether turnout is fairly representative of creditors.
• Lugano Convention – the UK is now no longer party to this following Brexit (as of 1 January 2021). It nevertheless applied in Gategroup as the RP in that case was issued before 1 January 2021.
• “No worse off test” – a test which must be satisfied to use the cross-class cram-down procedure. Must be established that the dissenting class would be no worse off under the plan than they would be in the relevant alternative.

Cases Referenced

Re Provident SPV Limited (“Provident”) [2021] EWHC 2217 (Ch)

Re Hurricane Energy Plc (“Hurricane Energy”) [2021] EWHC 1759 (Ch)

Re All Scheme Ltd (“Amigo Loans”) [2021] EWHC 1401 (Ch)

Re Virgin Active Holdings Ltd (“Virgin Active”) [2021] EWHC 1246 (Ch)

Re Gategroup Guarantee Ltd (“Gategroup”) [2021] EWHC 304 (Ch)

Re DeepOcean 1 UK Ltd and others (“DeepOcean”) [2021] EWHC 138 (Ch)

Julia Kotamäki, London trainee solicitor, contributed to the drafting of this alert.